HJ 


UC-NRLF 


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War  Finance 
Primer 


National  Bank  of  Commerce 
in  ISew  York 


MAT.  1917 


GIFT  or 


"— =1  j 


I  I 


A  BIG  loan  helps  to  ensure 
^  *■  victory.  A  big  loan  will 
also  shorten  the  War.  It  will 
help  to  save  life;  it  will  help 
to  save  the  British  Empire; 
it  will  help  to  save  Europe; 
it  will  help  to  save  civilization. 

The  Prime  Minister  of  England, 

Guildhall,  January  ii,  1917. 


War  Finance  Primer 


THE  greatest  immediate  service  the  American 
people  can  render  in  this  war  for  universal 
liberty  throughout  the  world  is  to  furnish  the  means 
for  its  vigorous  prosecution.  This  bond  issue  is  the 
first  step.  I  earnestly  bespeak  the  co-operation  of 
every  citizen  throughout  the  length  and  breadth  of 
the  land  in  this  great  service  of  patriotism. 

The  Secretary  of  the  Treasury, 
Washington,  May  2,  1917. 


>     ■%  o  i 


Service  Department 

National  Bank  of  Commerce 
in  NeM^  York 

May,  1917 


Summary 

In  the  following  pages  three  main  sections  are  offered. 
The  first  was  prepared  by  Professor  E.  R.  A.  Seligman  of 
Columbia  University,  one  of  the  world's  foremost  authori- 
ties on  Public  Finance.  He  surveys  the  present  American 
situation  with  regard  to  the  possible  sources  of  taxation, 
and  outlines  what  he  believes  to  be  the  proper  balance 
between  taxation  and  bond  issues. 

The  second  section  is  a  chapter  on  "The  Financial 
Management  of  a  War"  from  the  standard  work  by  Dr. 
Henry  C.  Adams,  entitled  "Public  Debts."  This  chapter 
is  recognized  generally  as  the  best  study  in  English  on  the 
subject.  The  book  is  now  out  of  print,  but  we  are  able, 
through  the  courtesy  of  the  author  and  the  publishers, 
Messrs.  D.  Appleton  and  Company,  to  make  it  available 
at  this  time.  It  was  reprinted  at  the  time  of  the  Spanish 
War  and  the  copyright  has  only  recently  been  renewed. 

The  third  section  contains  a  brief  study  of  financing 
and  taxation  during  the  present  war,  together  with  figures 
on  national  wealth.  Messrs.  P  .  R  McElvare  and  Louis 
Gottlieb  of  Columbia  University  under  the  direction  of 
Professor  Seligman,  p'*ep3:t^d  this  material  for  us  from 
official  documents.  Owing  to  unsettled  conditions  reliable 
material  of  this  sort  is  extremely  hard  to  accumulate. 

This  book  has  been  sent  to  members  of  Congress,  to 
all  national  and  state  banks  and  trust  companies,  to 
prominent  business  men  and  to  representative  newspapers. 
It  is  believed  it  will  be  an  aid  to  clear  thinking  on  the 
fundamentals  of  war  financing  and  will  tend  to  bring  the 
country  solidly  behind  the  financial  program  of  the  Gov- 
ernment. Readers  of  this  book  who  care  to  pursue  the 
subject  further  are  invited  to  communicate  with  the 
National  Bank  of  Commerce  in  New  York. 


CONTENTS 

Parti 

Page 

BRITISH  WAR  LOAN  ADVERTISEMENTS 9 


Part  II 

HOW  TO  FINANCE  THE  WAR 19 

By  E.  R.  A.  Seligman,  McVickar  Professor  of  Political  Econ- 
omy, Columbia  University,  and  Robert  Murray  Haig, 
Assistant  Professor  of  Economics,  Columbia  University. 

1.  Loans  versus  Taxes 24 

2.  Loans 30 

3.  Taxes 36 


Part  III 

FINANCIAL  MANAGEMENT  OF  A  WAR 49 

By  Henry  C.  Adams,  Ph.  D.,  LL.  D.,  Professor  of  Political 
Economy  and  Finance,  University  of  Michigan. 


Part  IV 

BONDS  AND  TAXATION 89 

Wealth 91 

Loans. 95 

United  States 95 

United  Kingdom 95 

Canada . 102 

India 103 

Australia 103 

France 103 

Russia 104 


3G1)179 


Page 

Italy 104 

Germany 105 

Austria-Hungary 105 

Public  Debts  and  Annual  Debt  Charges 106 

Taxation 107 

United  States 108 

Great  Britain 110 

France 116 

Germany 121 

Canada 123 

Russia 125 

Italy 128 

Austria,  Turkey,  etc 128 


Party 

WAR  FINANCE  ACT 129 

Illustrations:  Opposite 

Page 

National  Bank  of  Commerce  in  New  York   32 

The  Largest  Warrant  Ever  Signed 48 

War  Loan  Meeting  in  London 64 

The  Most  Popular  French  War  Loan  Poster 80 


ForcM^ord 

This  book  is  published  by  the  National  Bank  of  Com- 
merce in  New  York  as  part  of  its  effort  to  co-operate  with 
the  Government  in  war  financing. 

Economic  forces  have  turned  the  tide  of  many  battles. 
United  States  dollars  as  well  as  United  States  men  must  be 
sent  to  the  front.  Whenever  our  country's  financial  re- 
sources are  mobilized  and  utilized,  they  will  have  a  pro- 
found effect  upon  the  immediate  prosecution  of  the  war, 
and,  if  well  used,  upon  the  economic  stability  of  our  coun- 
try in  future  generations. 

War  finance  problems  are  not  simple,  but  the  main 
principles  involved  may  be  outlined  with  some  degree  of 
certainty.  After  having  made  a  survey  of  the  available 
material,  we  believe  this  War  Finance  Primer  will  help  to 
point  out  the  dangers  involved  and  the  best  general  course 
to  be  adopted. 

The  crux  of  the  matter  is  to  strike  a  balance  between 
loans  and  taxes.  The  present  generation  cannot  avoid 
economic  sacrifice.  At  the  same  time  our  industrial  and 
commercial  life  should  be  fostered  and  the  incentive  to  do 
business  should  be  preserved.  To  some  extent  we  must 
pay  as  we  go;  but  we  must  not  kill  the  goose  that  lays  the 
golden  egg. 

Our  economic  stability  demands  that  we  determine 
the  happy  medium  between  bond  issues  and  taxation.  The 
present  problem  is  not  only  to  raise  the  necessary  money 
for  a  vigorous  prosecution  of  the  war,  but  to  impress  upon 
Americans,  probably  the  most  extravagant  people  in  the 
world  today,  the  fact  that  thrift  and  economy  are  the  only 
permanent  basis  of  a  nation's  commercial  greatness. 

The  Government  has  wisely  indicated  its  intention  to 
avail  of  the  country's  financial  and  commercial  skill.    The 


financial  world  has  unreservedly  offered  its  facilities  with- 
out profit.  The  banks  will  do  their  part  in  raising  the 
money  needed  by  the  Government. 

This  situation  provides  a  wonderful  opportunity  to 
educate  the  people  to  co-operate  with  the  Government  in 
financial  matters.  In  France,  the  securities  of  the  French 
Government  are  the  favorite  form  of  investment.  Herein 
lies  one  of  the  reasons  for  French  financial  and  commer- 
cial soundness.  The  great  commercial  expansion  to  fol- 
low the  present  war  will  rest  upon  a  sounder  and  more 
permanent  footing  if  the  American  people  can  be  induced 
to  participate  more  fully  in  the  securities  of  our  Govern- 
ment and  of  our  allies. 


JAMES  S.  ALEXANDER, 

President. 


May,  1917. 


PART  I. 


British  War  Loan  Advertisements 


^HESE  British  war  loan 
advertisements  are  repro- 
duced from  THE  LONDON 
TIMES.  The  issue  in  which 
each  appeared  is  indicated  be- 
low the  reproduction.  Each 
of  them  except  the  last  two 
occupied  a  full  page. 


HAVE  YOU  INVESTED 

in 

THE  WAR  LOAN? 


THE  LAST  DAY  IS  FRIDAY  THE  16™ 
AND    GERMANY   IS   WATCHING   US. 


IF  YOU  HAVE  NOT  ALREADY  INVESTED  EVERY  SHILLING  YOU  CAN  SCRAPE  TOCETHER- 


-DO  SO  NO*. 


If  you  have  £5  or  any 
amount  up  to  £50  to 
lend,  go  to  the  nearest 
Money  Order  Post 
Office,  and  they  will 
invest  it  for  you  in 
War  Loan.  You  will 
get  a  receipt  for  your 
money  and  afterwards 
they  will  send  vou 
your  stocL 


HAS   IT 

OCCURRED  TO  YOU 

that  you  can  help  to  end  the 

War  by  borrowing  on  your 

Life  Policy 

OR 

by  obtaining  a  Loan  from 
your  Bank 

OR 


If  you  have  £30  or 
over  to  lend  to  your 
Country,  go  to  your 
Bank  Manager.  He 
will  help  you  to  in- 
crease your  lending 
power.  The  Bank 
Managers  have  inti- 
mated their  desire  to 
do  everything  in  their 
power  to  make  the 
Victory  Loan  an 
overwhelming  success 


By  CONVERTING  YOUR  TREASURY 
BILLS  INTO  WAR  LOAN. 

The    Bank   will   accept   the   War   Loan 

it   buys   for  you   as  security  for  what  it 

lends   to  you. 


February  S,  1917. 


^ 


Are  You  Holding 
your  Meeting  To-morrow? 

Employers  throughout  the  country  are  lo-morrow  holding  meetings 
of    their    workpeople   and     explaining    to    them    the    details    of 

THE  WAR  LOAN, 

Many  firms  by  advancing  money  to  their  employees 
against  future  savings  are  helping  them  to  increase 
their    contribution    to    the   Victory    War     Loan 

Will  you  do  the   same  ? 

If  every  wage-earner  in  the  Kingdom,  at  this  hour  of  the  Empire's 
need,  subscribes  to  the  Victory  War  Loan,  the  Nation,  by  Feb.  16th, 
will  have  raised   a  sum  unexampled  in  the  history  of  the  World. 

It  is  the  millions  of  one  hundred,  fifty, 
and    five    pounds   that    are    wanted. 

Tlie  following  suggestions,  which  have  been  already  adopted  by  some  of  the  largest  firms, 
may    assist    you    in    devising    your    scheme     for    to-morrow's    meeting    of  your    workpeople. 


EMPLOYERS  can  do  admirable  service  to  their 
country  by  mabng  ad^'ances  to  their  employees 
agaiml  savings  to  be  invested  in  the  War  Loan. , 
These  advances  can  bedeductedin  regular  weekly  in- 
;tatments  from  wages.  A  firm  might  advance  to 
ofiKials  sums  not  exceeding  one  half  of  present 
salaiy.  or  to  permanent  worltpeopic  sums  not  exceed- 
ing £47  10s.  and  with  this  money  lake  up  for  them 
a  corresponding  amount  of  War  Loan  in  accordance 
with  the  terms  o(  the  prospectus.  In  the  case  of 
officials  the  repayments  may  be  spread  over  two 
years  by  agreed  deductions  from  the  weekly,  monthly, 
or  quarterly  salary :  advances  (o  workpeople  may  be 
repaid  wilhm  one  year  by  weekly  deductions  at 
ihe  rite  of.  approximately.  Is.  9d.  per  week  for 
each  £3  worth  of  slock  lakca  up. 


A  LL  stock  acquired  on  behalf  of  employees  may 
/-\  be  placed  in  the  jomi  names  of  two  Trustees,  re- 
maining in  their  names  until  the  stock  is  paid  for 
in  full  when  it  would  be  handed  over  to  the  employees. 
The  amount  of  interest  received  b  respect  of  the  stock 
acquired  would  be  placed  to  the  employee's  credit  and 
thus  go  in  reduction  of  the  amotmt  advanced.  No 
interest  should  be  charged  by  the  firm  in  respect  of  the 
amounts  advanced,  and  any  wage-earner  whose  service 
with  the  company  ceases  before  the  advance  made 
to  him  is  repaid  should  have  the  option  of  either  pay- 
ing the  balance  in  full  or  having  his  instalments  returned 
to  him.  This  scheme  involves  the  loss  of  interest  to  the 
firm  on  the  money  advanced,  but  many  employers  are 
making  that  concession  to  encourage  their  workpeople 
to  invest  m  the  Loan. 


—OR  WORKERS  CAN  FORM  ASSOOATIONS  AMONG  THEMSELVES.  OR  THEY  CAN  CO  TO  THE  POST  OFFICE. 
BANK,  OR   TO  THEJR   LOCAL   WAR    SAVINCS    COMMITTEE    WHO   WIU    DO    EVEBYTHING   FOR    THEM. 


titi'iMMMmnMmMMmim^^ 


February  8,  1917. 


fSm 


iwrnwiKsniiivisiri'iiiiiiiiiiiiiiinMiiiw 


r.vmm^m!J|\vw^W:lxwf^WlWl■fl'mf'J]!J?i^n'>"V'wmlfww^ 


ITiursday 


WHOEVER  has  taken  no  share  at  all  in  the 
Nation's  War  Loan  when  Friday  arrives  caa 
only  be  regarded  cts  hopelessly  declassi,  and  equally 
hopelessly  stupid.  For  not  merely  is  th:s  War  Loan 
the  most  Jmport^ut  e\'«i"  launched  ,  in  our  financial 
history  by  a  B.iti^h  Government  on  account  of  its 
objects  but  it  is  also,  th:;  trust  attractive,  in  its  terms 
as  an  investmen*'.  An3  nb  se{r6t  jias  l>e<^n  made  of 
the  fact  that  such~  terms  will  not  be  repeated.  Those 
who  keep  their  money  in  their  pockets  now  will 
assuredly  be  sorry  for  it  later,  when  they  are  asked 
to  show  how  they  responded  to  the  call  of  the  Slate." 

"THE   TIMES." 

WHAT  CASH  OR  BANK  BALANCE  HAVE  YOU?  WHAT  SECURITIES 
OR  PROPERTIES  CAN  YOU  BORROW  AGAINST?  HOW  MUCH  CAN 
YOU  SAVE  THIS  YEAR  ?  BY  WHICH  OR  ALL  OF  THESE  METHODS 
ARE    YOU   GOING  TO    INCREASE   YOUR   WAR    LOAN    INVESTMENT? 


THE  Victory  War  Loan  must  be  an 
overwhelming  success,  and  there  remain 
only  three  days  in  which  you  can  do  your 
part     Realise  your  indi\idual  responsibihty. 


LEND  to  the  Government  every  shilling  you  can 
>scrape  together.  Decide  to  wear  old  clothes, 
old  boots,  old  dreses;  eat,  drink  and  smoke  less,  and 
then  borrow  against  your  future  savings  to  invest  in 


THE  WAR  LOAN. 


no  TO-DAY  TO  YOUR  BANK, 
^"^  Employer,  or  Local  War  Savings 
Committee,  and  arrange  for  an  advance,  and 
then  buy  War  Loan  through  any  Money 
Order   Post  Office,  Bank  or  Stockbroker. 


VOUR  MONEY  IS  SAFE.  Your 
■*■  interest  is  sure,  and  whenever  you  need 
your  money  you  can  sell  your  stock  through 
any  Bank.  Stockbroker,  or  Post  Office. 
Do  your  duty  to-day — there  is  still   time. 


1 


^.  ^maMHijiiii]iiiiiiiiiii|miiiiiiiiuiiiiiiiiuiiiiiuin 


m 


February  14,  1917. 


'iiiiiiimii/»imiiiii!ii|ii'iiinmiiiwfni!Wi 


^Im^mSnSSSSS^^ 


— at  12  o'clock  to-day 

STOP 

and  ask  yourseK  this  question 

Have  I  helped  theWar  Loan? 

HAVE  you  done  every-  ¥F    you   have  not   done 

thing  in  your  power  leverything  in  your  power 

to  make  the  Victory  War  do    so   now  at  the   Post 

Loan    an    overwhelming  Office,   Bank,  or  through 

success?  If  you  have,  your  your  Stock  Broker.   There 

conscience  is  clear.  is  still  time. 

YOUR  COUNTRYMEN  ARE  GIVING  THEIR  LIVES 
YOU  ARE  ONLY  ASKED  TO  LEND  YOUR  MONEY 

To-morrow  is  the  Last  Day  ^o  invest  in 

THE  WAR  LOAN 


February  15,  1917. 


r 


The 

WAR 
LOAN 

&n<]  the 

Y.M.C.A. 


Lord  Derby:— 

-  Th0    VM.CjK.  t»  tm- 


Have  you  thrown 
your  gift 

into  the  scale? 

EVERY  POUND  YOU  GIVE  TO  THE  Y.M.C.A.  TILL  16th  FEB. 
YOU  LEND  TO  YOUR  COUNTRY. 


TO  assist  in  the  gnu  National  rfloit  to 
make  the  new  War  txvan  an  over- 
whelmiDg  succcii,  every  penny  sub- 
scribed to  the  V.M.C  A.  during  (he  ncxi 
fonnight  (unle5<i  specially  earmarked  for  other 
purpoiei)  will  be  used  for  pyrchauog  Wsr 
Loaa  Stock.. 

The  very  large  and  growing  work  o(  the 
Y.M.C.A.  for  our  Naval  and  Military  Force*, 
placet  an  ever  increasing  responsibility  upon 
the  AssociatioD  a*  the  War  proceeds,  and  hi]) 
by  no  means  cease  when  the  War  n  o»er. 
Thrt  rcifonMbiluy  will  be  greatly  ligh(et>ed 
by   the   Fund  to  be  created  during  the   nrti 


few  da\!.  It  will  enable  the  Aivociatifcn,  lo 
what  are  admittedly  the  critical  rrK>nths  ol  the 
War,  <•  make  adet]uate  arraflgcments  ahead 
for  the  welfare  and  support  of  our  troop.  It 
IS  hoped  that  a  <u0icicni  sum  will  be  lonh- 
coming  lo  purchase  jf  ico.ooo  of  the  new  W  ar 
Loan  Those,  therefore,  who  have  felt  some 
degree  of  conflictjon  betveeo  the  financial 
needs  of  iKe  country  and  the  claims  of  ihe 
Y.M.C.A.  Deed  do  so  no  longer.  If  yoj 
send  in  your  gifi  before  February  17th,  you 
will  not  only  be  contributing  directU  to  the 
War  Loan,  but  you  will  a»i<i  m  the  most 
practical  w^y  the  work  of  the  Y.M.C.A.  for 
the  troopi. 


Tlt«  R«d  TruD^ie 

WAR  LOAN 

ThcmoTDcter. 

£in,(iM 


I5«,000 


£ZS,000 


Oving  U  thr  tJ^rv  ihnri  limt  ai'CttaHt.  it  (1  ftil  that 
IV  ualt>»tle  tt,lt*tlK>m  c/  iht  Sallonal  War  Saxiit* 
CommUUt.  to  tnilitnU  Flog  Oayt  IkrougKoitl  the 
ceunrry.  15  Inapproprialt  in  tht  (ott  of  'A*  K  .W  C^ 
//  (J  confidtntli,  koptd  that  Iht  dtrtd  gl/ti  c/  Itu  publx 
lo  Iht  Y  M£A  during  iht  mtxt  fijrinlgkt.  vitl  tnabU 
m  MMT*  largfT  amovl  of  Waf  Loan  Siofk  to  A< 
pureKatrd  ihan  itvuld  b4  fC'i'bU  ai  iht  rtnti  of  Iht 
flag  boy  proposal 

Ttmt  ts  of  Iht  ylmoU  trnp^rtanrr  1/  iht  tmettss  0/  ihr 
new  loan  ii  lo  *«  aiiurtd.  Will  you  mot  ihrov  yeur 
•w-a  gift  iitto  Iht  tcolt  l»-day  ? 


WILL    YOU    POST    THIS    TO-DAY? 


1   ILL   Bi/ctit- YMCA  NiiloMi  Hndqoinc**. 
U.  KimmB  SquvT.  LoDdoo.  WC 


^1^.^ 


To  give  now  is  to 
double  service  to  year 


render  a 
Country 


^»v> 


at  the  most  critical  time  io  brf  prrat   hL*tory. 

SEND   YOUR   GIFT   TaOAY   to   the   Hoo. 

Treasurer.    Y.M.C  A.     National     Her.dqu3i(ers, 

12-13,  Russell  Square.  London.  W.C. 


February  5,  1917. 


THE  WAR  LOAN  and  the  Y.M.C.A. 

XiM yvu  ii£^  &  ta^ 


HUMajestyThe  King 


Tht   Premier    (Mr    L/ffyrf 
Ctorge) 


February  U,  1917. 


IJAVE  you  asked  the 
^  ^  Bank  Manager  how 
he  can  help  you  to  sub- 
scribe to  the  War  Loan? 

If  not— 
do  so  to-day. 

The  more  you  lend — 
the  sooner  the  war  will  end. 

A   NY  Money  Order  Post  Office  will 
/"^^  hand  you  a  £l    War  Savings  Certi- 
ficate for  1  5/6.     Any  Bank  will  buy 
War  Loan  for  you  from  £5  upwards.     Or 
go  to  your  local  War  Savings  Committee, 
who  will  do  everything  for  you. 

February,  1917. 


YOUR 
MONEY 

CANNOT 
BE 

NEUTRAL 


HAVE  you  helped  your 
Country  by  investing  in  the 
War  Loan,  or  have  you  helped 
Germany  by  keeping  your 
money     in     your     pocket? 


THE 

WAR  LOAN 

CLOSES 

TO-NIGHT. 


February  16,  1917. 


PART  11. 


How  to  Finance  the  War 


How  to  Finance  the  War* 

By  E.  R.  A.  SELIGMAN 

McVickar  Professor  of  Political  Economy,  Colnmbia  University 

and 

ROBERT  MURRAY  HAIG 

Assistant  Professor  of  Economics,  Colnmbia  University 

Making  war  is  easily  the  most  expensive  function  of 
government.  Always  costly,  in  modern  times  it  has  come 
to  involve  truly  astounding  expenditures.  When,  as  is 
now  the  case,  the  entire  accumulated  wealth  and  pro- 
ductive power  of  a  nation  join  with  its  man  power  to 
match  strength  with  the  adversary,  the  skill  used  in 
raising  the  necessary  funds  is  of  paramount  importance. 
Having  decided  to  enter  the  conflict,  the  United  States 
government  stands  in  immediate  need  of  billions  of 
dollars.  How  many  billions  will  be  required  before  the 
war  is  brought  to  its  end  cannot  be  foretold;  but  our 
resources  may  be  strained  to  their  capacity.  A  number 
of  plans  have  been  proposed  for  meeting  the  situa- 
tion, each  different  in  its  fiscal  and  economic  con- 
sequences. The  problem  is  to  determine  upon  the 
particular  program  which  will  best  distribute  the 
burden  in  accordance  with  ability  to  bear  it,  and 
which  will  produce  the  huge  sums  needed  with  the 
least  impairment  of  our  resources.  To  cripple  our- 
selves at  the  outset  of  the  war  with  a  faulty  financial 
plan  might  have  disastrous  consequences.  To  adopt  any 
but  the  wisest  policy  of  finance  would  involve  unnecessary 
waste  and  suffering. 

New  Policies  Are  Galled  For 

There  are  good  reasons  why  the  best  plan  for  finan- 
cing this  particular  war  differs  radically  from  the  plans 
which  we  have  used  in  the  past.  Political  problems,  for 
example,  which  in  other  days  have  been  powerful  factors 

*  COLUMBIA  WAR  PAPERS:  This  article  was  prepared  by  Professor 
Seligman  for  publication  as  one  of  the  valuable  Columbia  War  Papers,  a  series  of 
pamphlets  on  the  problems  and  duties  of  American  citizens  in  meeting  the 
national  needs  in  the  present  world  conflict.     By  arrangement  with  the  Division 

21 


in  moulding  fiscal  policies  are  fortunately  of  negligible 
importance.  Moreover,  the  economic  situation  is  in- 
finitely more  favorable  than  any  which  has  existed 
heretofore.  We  have  not  only  greater  resources,  but 
resources  of  a  different  type  upon  which  to  draw.  In 
other  wars,  our  traditional  policy  has  usually  been  to 
tax  ourselves  only  when  no  one  would  lend  us  the  money. 
In  the  absence  of  political  and  economic  exigencies,  a 
very  different  policy  may  be  adopted.  Finally  there 
have  been  radical  social  changes  since  our  previous  wars 
which  will  afTect  our  methods  of  finance.  Types  of  taxes 
and  forms  of  bond  issues  which  were  considered  unobjec- 
tionable not  long  ago  will  not  now  measure  up  to  the 
ideas  of  justice  established  by  a  democracy  which  has 
become  progressively  more  enlightened  and  intelligent. 
The  problem  of  financing  the  war  resolves  itself  into 
three  distinct  parts,  each  of  which  will  be  treated  in  a 
separate  section.  The  first  is  concerned  with  the  general 
question  of  loans  versus  taxes.  To  what  extent  shall  the 
expenses  of  the  war  be  met  by  borrowed  money  and  to 
what  extent  by  the  proceeds  from  taxation?  The  second 
section  discusses  the  kind  of  indebtedness  to  be  incurred 
and  the  third  the  methods  of  taxation  to  be  employed. 

We  Must  Prepare  for  a  Long  War 

But  before  these  problems  can  be  discussed  with 
any  degree  of  definiteness,  it  is  necessary  to  make  some 

of  Intelligence  and  Publicity  of  the  University,  the  material  is  published  simul- 
taneously by  the  National  Bank  of  Commerce  in  New  York  for  general  circulation 
among  bankers  and  business  men.  The  article  is  copyrighted  by  Columbia 
University. 

A  complete  list  of  the  Columbia  War  Papers,  copies  of  which  may  be  had 
upon  application  to  the  University,  follows: 

No.  1,  Enlistment  for  the  Farm,  By  John  Dewey;  No.  2,  German 
Subjects  Within  Our  Gates,  By  the  National  Committee  on  Prisons  and  Prison 
Labor;  No.  3,  MOBILIZE  THE  CoUNTRY-HOME  Garden,  By  Roscoe  C.  E.  Brown; 
No.  4,  Our  Headline  Policy,  By  Henry  Bedinger  Mitchell;  No.  5,  Deutsche 
ReiCHSANGEHoRIGE  HIER  ZU  Lande,  Vom  Natio'nalausschuss  fiir  Gefangnisse 
undGefangnisarbeit;  No.  6,  FOOD  PREPAREDNESS,  By  H.  R.  Seager  and  R.  E. 
Chaddock;  No.  7,  HOW  TO  FINANCE  THE  WAR,  By  Edwin  R.  A.  Seligman  and 
Robert  Murray  Haig;  No.  8.  FARMERS  AND  SPECULATORS,  By  B.  M.  Anderson,  Jr.; 
No.  9,  A  Directory  of  Service,  Compiled  under  the  direction  of  John  J.  Coss; 
No.  10,  City  Gardens,  By  Henry  Griscom  Parsons;  No.  11,  BREAD  BULLETS, 
By  R.  S.  MacElwee;  No.  12,  RURAL  EDUCATION  IN  War,  By  Warren  H.  Wilson. 

22 


general  assumptions  regarding  the  probable  length  of 
the  war  and  the  part  we  are  to  play  in  it.  For  the  magni- 
tude of  the  sums  to  be  raised  is  of  very  great  importance 
in  connection  with  the  probable  strain  on  the  revenue 
system  because  of  increased  taxation,  and  in  connection 
with  the  general  economic  effects  of  an  appeal  to  credit. 
There  is  every  indication  that  the  policy  of  the  United 
States  in  this  war  will  be  one  of  enthusiastic  cooperation 
with  the  Allies.  To  the  extent  that  we  are  at  present 
prepared  to  furnish  military  assistance,  that  will  be  given; 
far-reaching  measures  will  be  adopted  to  train  a  large 
army;  and  economic  aid  will  be  extended.  But  there 
appears  to  be  a  wide-spread  belief  that  the  war  will  end 
very  quickly,  perhaps  before  our  power  can  be  brought 
to  bear  to  any  considerable  extent.  If  this  view  is  correct, 
the  financial  problem  will,  of  course,  be  insignificant. 
But  it  is  the  part  of  prudence  to  prepare  for  the  alterna- 
tive issue.  In  this,  we  may  well  learn  a  lesson  from  the 
other  belligerents.  Although  Lord  Kitchener  did  predict 
a  three-year  war,  the  fiscal  policies  of  all  the  European 
nations  were  predicated  on  a  much  shorter  period ;  and  it 
was  only  after  a  lapse  of  a  considerable  time  that  plans 
for  financing  a  protracted  contest  were  adopted.  Lord 
Kitchener's  three-year  period  has  almost  expired  and 
yet  even  now  it  cannot  be  definitely  asserted  that  the 
end  of  the  war  is  in  sight.  There  appears  to  be  no  sound 
basis  of  known  facts  for  the  belief  that  the  Central 
Powers  are  on  the  verge  of  collapse.  What  the  true 
military  and  political  situation  may  be  in  Germany, 
it  is  impossible  to  judge  with  accuracy.  But  he  is  an 
optimist  indeed  who  would  depend  upon  an  economic 
or  financial  breakdown  to  bring  about  the  cessation  of 
hostilities  within  a  short  time. 

Our  War  Cost  May  Reach  Ten  Billions  a  Year 

Assuming  that  we  are  to  enter  into  this  war  in  a 
whole-hearted  manner  and  assuming,  as  seems  prudent 
and  reasonable,  that  the  war  will  last  long  enough  for 
us  to  bring  our  forces  into  action,  how  much  money 
will  be  needed?     This  question,  of  course,   can  be  an- 

23 


swered  only  by  the  roughest  of  estimates.  With  no 
experience  of  our  own  to  guide  us,  the  English  experi- 
ence forms,  perhaps,  our  best  material  for  a  guess. 
Bonar  Law  has  recently  stated  that  the  total  expendi- 
tures of  England  for  the  fiscal  year  just  ended  will  be 
about  £2,140,000,000  or  approximately  ten  and  one-half 
billions  of  dollars.  It  is  not  probable  that  our  full  share 
in  the  war  will  be  less  than  this.  Doubtless,  our  army 
at  first  will  be  considerably  smaller  than  that  of  Great 
Britain;  but  it  must  be  remembered  that  the  cost  of  our 
military  forces,  particularly  the  pay  of  our  soldiers  and 
sailors,  is  larger  than  is  the  case  abroad.  Before  the  war, 
the  military  and  naval  expenditures  of  the  United  States, 
in  spite  of  the  insignificant  size  of  the  army,  were  ap- 
proximately as  great  as  those  of  Germany.  An  expedition- 
ary force  to  Europe  would  involve  outlays  of  enormous 
extent.  Finally,  we  shall  doubtless  be  immediately 
called  upon  to  make  considerable  advances  to  the  Allies. 
All  in  all,  it  would  seem  that  our  war  expenses  might 
reasonably  be  expected  to  approximate  ten  billions  a 
year.    How  can  this  sum  best  be  secured? 

I.    LOANS  VERSUS  TAXES 

There  is  in  this  country  no  'war  chest'  upon  which 
to  draw  in  an  emergency;  there  are  no  profits  from 
enterprises  conducted  by  the  government;  and  there 
will  probably  be  no  indemnities  wrung  from  a  con- 
quered people.  It  follows  that  the  money  must  be 
collected  by  taxation  or  be  borrowed.  It  is  barely  con- 
ceivable that  all  the  money  might  be  borrowed  and 
taxation  avoided  entirely  for  the  present.  On  the  other 
hand,  it  is  being  seriously  urged  by  many  well-informed 
persons  that  the  entire  cost  of  the  war  be  met  by  current 
taxes.  There  are  a  number  of  reasons  why  the  wisest 
course  will  lie  between  these  extremes. 

History  Points  Out  What  to  Avoid 

Our  own  history  is  perhaps  most  useful  for  the  pur- 
pose of  pointing  out  what  to  avoid  rather  than  what  to 

24 


adopt  in  war  finance;  but  it  is,  nevertheless,  of  import- 
ance to  recall  that  the  policy  of  meeting  all  war  expenses 
by  taxation  is  entirely  new  in  the  United  States.  Indeed, 
the  question  here  has  rather  been  whether  taxes  could 
be  made  sufficiently  high  to  meet  merely  the  interest 
charges  on  the  money  borrowed  without  any  allowance 
even  for  amortization.  Thus,  Gallatin's  original  war 
budget,  at  the  time  of  the  struggle  with  England,  con- 
templated a  tax  levy  for  interest  only.  But  the  taxes 
actually  imposed  proved  insufficient  even  for  this  pur- 
pose, with  the  result  that  in  1814  Dallas  had  to  be 
summoned  to  extricate  the  country  from  a  condition  of 
bankruptcy — an  end  which  he  accomplished  through  a 
more  vigorous  policy  of  taxation.  Again,  the  financial 
history  of  our  Civil  War  is  primarily  one  of  loans,  forced 
or  voluntary,  rather  than  one  of  taxes.  During  1862 
and  1863,  when  the  proceeds  from  loans  were  about 
$300,000,000,  the  increase  in  taxes  over  those  of  peace 
times  scarcely  sufficed  to  pay  the  interest  on  the  new 
debt.  During  the  first  year  of  the  conflict,  they  were 
entirely  inadequate  for  this  purpose.  It  w^as  not  until 
after  1864  that  the  taxes  made  any  substantial  contribu- 
tion to  war  expenses.  Finally,  in  the  Spanish  w^ar,  a 
$200,000,000  loan  was  the  foundation  stone  of  the  finan- 
cial plan,  the  sole  increases  in  taxation  being  new  internal 
revenue  duties  which  yielded  only  about  $25,000,000  of 
additional  revenue  in  1898  and  $125,000,000  in  1899. 

Not  only  would  it  be  a  novelty  to  American  finance 
to  levy  war  taxes  in  larger  amount  than  required  for 
interest  on  the  debt,  but  it  would  be  almost  as  much 
a  novelty  in  European  countries.  Germany,  during 
the  present  war,  refrained  for  a  long  time  from  impos- 
ing any  w^ar  taxes  at  all,  and  the  recent  additions  to 
the  imperial  tax  budget  are  intended  primarily  to  defray 
the  interest  on  the  huge  loans.  The  policies  of  England 
and  France  have  been  essentially  the  same  except  that 
England  began  to  tax  for  interest  purposes  somewhat 
earlier  than  the  others.  The  total  war  expenditures  of 
England  up  to  April,  1917,  have  been  stated  by  Mr. 
Bonar   Law   to   be   about  £4,200,000,000  and   the  total 

25 


debt  to  be  £3,900,000,000.  This  debt  of  approximately 
$20,000,000,000  is  expected  to  increase  to  $30,000,000,000 
by  the  end  of  the  present  fiscal  year,  and  will  then 
entail  an  interest  charge  of  about  $1,500,000,000  annu- 
ally. The  new  English  war  taxes  yield  only  a  relatively 
slight  amount  over  this  interest  charge. 

The  Policy  of  *  Taxation  Only' 

It  is  not  to  be  inferred,  however,  that  because  the 
proposal  to  pay  for  the  war  by  current  taxation  is  strange 
in  the  history  of  war  finance,  it  is  therefore  undesirable. 
On  the  contrary,  it  is  a  proposal  which  has  many  features 
which  decidedly  commend  it  for  adoption.  Our  past 
practice  certainly  cannot  be  defended  as  a  perfect  model 
for  the  present  action,  and  we  are  in  such  a  strong  position 
economically  as  compared  with  the  other  nations  at  war 
that  we  may  well  be  able  to  withstand  a  more  rigorous 
financial  program  than  those  they  have  used.  It  should 
be  realized,  however,  that  any  taxation  beyond  that 
necessary  for  interest  payment  is  unusual  and  is  open 
to  the  uncertainties  which  arise  when  a  departure  is 
made  from  established  practice. 

It  seems  doubtful  whether  the  adherents  of  the 
'taxation  only'  policy  realize  the  full  practical  import  of 
their  proposal.  To  raise  the  carrying  charges  alone  on 
the  huge  sums  which  will  be  used  will  mean  taxation  of 
staggering  weight.  If  we  are  to  count  on  an  expenditure 
of  not  far  from  ten  billions  the  first  year  and  a  similar 
sum  for  a  possible  second  year  of  war,  it  would  be  neces- 
sary, assuming  that  all  current  war  expenses  are  to  be 
defrayed  by  loans  made  on  a  five  per  cent,  basis,  to  levy 
additional  taxes  to  the  extent  of  about  $500,000,000  for  the 
first  year  and  perhaps  one  billion  for  the  second  year  of  war. 
This  much  at  least,  everyone  will  agree,  should  be  covered 
by  current  taxation.  The  real  question  is  how  much  more 
shall  be  raised  at  once  by  this  method  for  amortization 
purposes  and  for  payment  of  war  expenses  directly? 
Let  us  examine  some  of  the  arguments  advanced  in  con- 
nection with  the  controversy  of  loans   versus   taxation. 

26 


Do  War  Loans  Induce  Price  Inflation?    •-'  [  Ot'>^ 

Among  the  arguments  in  support  of  the  taxation 
poHcy  is  one  which  holds  that  a  resort  to  loans  would 
lead  to  an  immense  inflation  in  prices.  Although  some 
merit  undoubtedly  attaches  to  this  view,  its  importance 
can  easily  be  exaggerated.  Whether  public  borrowing 
will  lead  to  an  inflation  of  prices  depends  largely  on  the 
conditions  on  which  loans  are  contracted.  If  the  sub- 
scriptions to  the  loan  are  defrayed  by  borrowing  from 
the  banks,  such  a  result  would  undoubtedly  ensue,  at 
least  to  the  extent  that  analogous  subscriptions  might 
not  have  been  made  to  ordinary  industrial  enterprises. 
But  if,  on  the  contrary,  there  is  a  large  loan  fund  in 
existence — if,  in  other  words,  the  accumulated  profits 
of  recent  years  have  not  yet  been  invested,  or  if  the 
subscriptions  to  the  loan  involve  simply  a  change  of  invest- 
ment from  private  enterprise  to  government  service, 
there  will  be  no  such  resort  to  credit  and  there  will  be 
no  such  inflation  of  prices.  It  is  entirely  probable  that, 
as  a  result  of  our  prodigious  prosperity  during  the  last 
year  or  two,  a  very  large  loan  could  be  floated  without 
an  inordinate  resort  to  banking  credit. 

Do  War  Loans  Favor  the  Wealthy  ? 

A  second  argument  takes  the  form  of  an  attack  upon 
the  loan  policy.  Subscriptions  to  loans,  it  is  maintained, 
will  be  made  by  the  wealthier  classes  who  will  thereby 
fasten  upon  the  community  as  a  whole  an  incubus  in 
the  shape  of  the  obligation  to  pay  them  interest  for  a 
long  time.  This  argument,  however,  presupposes  that 
the  tax  burden,  designed  to  defray  the  bond  interest, 
will  fall  primarily  on  the  poor.  If,  on  the  contrary,  the 
general  tax  system  is  so  adjusted  as  to  recognize  the 
principles  of  equality  and  ability  to  pay,  th£jjiJte£e&t-Ott- 
the  debt  will  be  primarily  defrayed  by  tCe  very, classes  . 
who  subscribe  to  the  bonds...  If  this  be  done,  it  i  ^  a  matter 
o7~in(fil]Ference  whether  the  tax  or  the  loan  policy  is 
adopted  so  far  as  the  burden  upon  the  poorer  classes  is 
concerned.     The  richer  portion  of  the  community  will 

27 


pay  the  bills  either  way.  But  it  is  a  matter  of  great 
importance  to  them  whether  they  are  asked  to  pay  in  two 
years  or  in  ten  years.  The  interests  of  the  poorer  classes, 
moreover,  may  be  very  adversely  affected  if  the  taxation 
policy  is  made  so  severe  as  seriously  to  cripple  industry 
in  general. 

'Conscription  of  Wealth' 

There  is  still  another  argument — one  which  depends 
for  much  of  its  force  upon  the  attractiveness  of  a  phrase 
which  seems  to  have  originated  in  Australia.  If  we  are 
to  have  conscription  of  men,  we  are  told  we  ought  also 
to  have  conscription  of  wealth  or  conscription  of  income. 
But,  in  the  first  place,  is  it  accurate  to  classify  and  to 
contrast  in  this  manner?  Is  it  proposed  to  draft  for  per- 
sonal service  only  the  poor  of  purse?  Will  not  the  wealthy 
be  called  upon  to  make  sacrifices  of  service?  The  pro- 
posal to  permit  able-bodied  men  of  wealth  to  purchase 
exemption  from  military  duty  by  surrender  of  their 
property  would  certainly  not  appeal  to  anyone.  When  war 
begins  to  reap  its  harvest,  there  will  doubtless  be  a  full 
measure  of  distress  among  the  wealthy.  Moreover,  does 
not  this  argument  appear  to  rest  to  some  extent  upon  a 
desire  to  punish  and  to  cause  suffering.^  Paraphrased,  it 
would  read  as  follows:  The  poor  will  have  to  suffer 
by  rendering  personal  service;  let  us  make  the  rich  suffer 
also  by  compelling  them  to  surrender  their  incomes. 
There  will  be  personal  service  rendered  by  both  rich  and 
poor,  and  if  the  war  continues  for  a  long  time  great 
suffering  will  ensue.  The  sacrifices  of  the  poorer  classes 
certainly  must  not  be  increased  by  the  addition  of  heavy 
economic  burdens.  Wherever  the  expenditure  of  money 
will  further  the  purposes  of  the  war,  will  prevent  suffering 
and  save  life,  the  money  must  be  spent.  The  financial 
burden  of  this  must  indeed  be  borne  by  those  who  have  a 
surplus,  and  there  is  every  indication  that  they  will 
accept  the  burden  willingly.  But  instead  of  planning  our 
war  finance  in  a  spirit  of  vindictive  destructiveness,  every 
effort  should  on  the  contrary   be   made   to  render  this 

28 


part  of  the  war  sacrifice  as  easy  and  convenient  to  bear 
as  possible. 

The  Burden  Should  Be  Distributed 

Moreover,  several  positive  considerations  may  be 
urged  against  the  extreme  form  of  the  'conscription  of 
wealth'  argument.  For  instance,  the  raising  of  all  war 
expenses  by  taxation  is  like  the  pay-as-you-go  policy  in 
peace  times.  The  objection  to  defraying  extraordinary 
capital  expenditures  out  of  taxation  is  that  it  causes  this 
year's  taxpayers  to  contribute  an  undue  share  for  benefits 
accruing  far  in  the  future.  Meeting  all  war  expenses  by 
taxation  makes  the  taxpayers  in  one  or  two  years  bear 
the  burden  of  benefits  that  ought  to  be  distributed  over 
a  decade  or  two. 

Again,  the  raising  of  such  immense  sums  would  in- 
volve an  unendurable  strain  upon  our  tax  machinery.  If, 
as  will  be  seen  later,  a  large  part  of  the  additional  sums  will 
have  to  come  from  income  taxes,  it  must  be  remembered 
that  the  great  mass  of  American  incomes  is  derived  from 
agriculture,  and  that  of  all  incomes,  these  are  the  most 
refractory.  The  only  result  of  an  attempt  to  'confiscate' 
might  be  the  complete  breakdown  of  the  tax  system. 

Wealth  Surplus  Needed  for  Charity 

Finally,  the  adoption  of  the  'taxation  only'  policy 
would  involve  a  very  serious  diminution  in  the  incomes 
which  at  the  present  time  are  largely  drawn  upon  for 
the  support  of  educational,  charitable  and  philanthropic 
enterprises.  Moreover,  this  source  of  support  would  be 
dried  up  precisely  at  the  time  when  the  need  would  be 
greatest.  In  calculating  the  advantages  of  the  policy, 
therefore,  it  is  necessary  to  consider  the  fact  that  the 
state  would  have  necessarily  to  assume  a  number  of 
functions  now  performed  by  private  individuals,  so  that 
not  only  would  some  of  the  gain  be  more  apparent  than 
real,  but  there  would  in  all  probability  be  a  considerable 
loss  entailed  by  the  dif^cult  and  hasty  transition  from 
private  to  public  activities. 

29 


Considerable  Tax  Increases  Are  Feasible 

For  the  reasons  made  clear  in  the  foregoing  discussion, 
it  appears  that  the  'conscription  of  wealth'  plan  in  its 
extreme  form  would  not  be  feasible.  It  is  entirely  feasible, 
however,  and  it  is  on  the  whole  very  desirable  in  our  pres- 
ent situation,  to  levy  taxes  far  in  excess  of  what  has  been 
our  custom  in  past  wars.  In  addition  to  money  to  pay 
interest  on  the  loans,  there  should  be  raised  by  taxation 
a  sum  intended  to  secure  a  speedy  amortization  of  the 
debt.  If,  as  we  shall  see  later,  the  debt  ought  to  be 
thrown  into  a  form  which  will  insure  its  disappearance  in 
not  more  than  ten  or  twenty  years,  the  amortization 
quota  should  amount  to  five  or  ten  per  cent,  annually. 
On  the  assumption  that  a  two-year  war  debt  would 
amount  to  twenty  billions,  there  would  be  needed  for  the 
amortization  quota  from  one  to  two  billions  a  year.  The 
fiscal  conclusion,  therefore,  would  be  that  we  should  raise 
by  new  taxation  for  the  first  year  of  the  war  at  least  one 
and  one-half  billions  of  dollars  (half  a  billion  for  interest, 
one  billion  amortization),  and  during  the  second  year 
three  billions  (one  billion  interest  and  two  billions  for 
amortizations).  When  one  recollects  that  the  total  fed- 
eral revenue  from  taxation  in  1915  was  $625,000,000,  he 
will  appreciate  what  a  stupendous  program  this  implies. 
It  involves  an  increase  in  taxation  far  in  excess  of  any- 
thing that  has  been  known  in  American  history  and  con- 
siderably more  than  what  has  been  attempted  in  Europe. 
To  accomplish  this  successfully  will  be  a  magnificent 
triumph  for  our  revenue  system.  We  should  indeed  raise 
by  taxation  as  much  as  we  can  without  arousing  discon- 
tent or  stifling  enterprise;  but  if  we  limit  ourselves  in  this 
war  merely  to  that  amount  without  resort  to  loans,  our 
participation  will  be  insignificant  and  ineffective. 

11.    LOANS 

The  arguments  of  the  advocates  of  'taxation  only'  will 
probably  not  receive  substantial  support  at  Washington. 
Indeed,  the  first  loan  bill  has  already  been  presented  to 

30 


Congress.      In   this  bill,   there  are  four  chief  points  of 
interest: 

1.  The  amount  of  the  issue; 

2.  The  rate  of  interest; 

3.  The  term  of  the  loan  and  provisions 

for  repayment;  and 

4.  The  problem  of  tax  exemption. 

Each  of  these  points  will  be  briefly  discussed. 

1.  The  biir  provides  for  an  issue  of  $7,000,000,000, 
of  which  $5,000,000,000  is  in  bonds.  If  our  calculations, 
based  on  the  experience  of  the  European  countries,  are 
correct,  the  present  issue  will  not  suffice  for  our  needs 
for  the  first  year.  It  is  indeed  the  largest  loan  that  has 
ever  been  issued  by  any  country  and  it  will  be  a  strong 
test  of  the  ingenuity  of  our  officials  and  the  loyal  readiness 
of  our  people.  It  is,  perhaps,  as  large  as  can  conveniently 
be  handled  at  one  time;  but  an  additional  loan  is  to  be 
expected  before  the  lapse  of  many  months. 

Rate  of  Interest 

2.  The  rate  of  interest  in  the  bonds  is  fixed  in  the  bill 
at  three  and  one-half  per  cent.  This  differs  radically  from 
the  proposal  made  on  page  30  that  the  loan  be  made  on 
a  five  per  cent,  basis.  In  the  first  place,  however,  the 
bonds  are  exempt  from  taxation.  Were  the  bonds  to  be 
subject  to  taxation,  the  rate  of  interest  would  have  to 
be  at  least  four  per  cent,  or  possibly  four  and  one-half 
per  cent.,  if  the  bonds  were  to  sell  at  par.  In  the  estimates 
made  on  page  30  no  allowance  is  made  for  the  exemption 
of  the  bonds  from  taxation  for  the  obvious  reason  that, 
in  the  main,  what  is  saved  by  the  government  in  the 
lower  rate  of  interest  due  to  the  tax-free  provision  will 
again  be  lost  by  the  government  through  the  diminished 
yield  of  the  income  tax.  Furthermore,  it  must  be  remem- 
bered that  this  is  only  the  first  instalment  of  what  is 
probably  to  become  a  gigantic  war  debt,  and  with  every 
future  issue  on   a  large  scale  the  rate  of  interest  will 

*  A  copy  of  the  War  Finance  Act  as  finally  passed  will  be  found  on  page  129. 

31 


doubtless  increase.  There  is  not  much  reason  to  expect 
that  in  a  short  time  our  credit  will  stand  very  much  higher 
than  that  of  the  other  warring  countries,  or  that  invest- 
ments in  government  paper  will  be  possible  at  a  much 
lower  rate  of  interest  than  in  secure  investments  of  a 
private  character.  The  destruction  of  capital,  which  is 
going  on  at  such  an  enormous  rate,  will  tend  to  bring 
about  a  gradual  rise  in  interest  rates.  It  therefore  still 
remains  a  conservative  estimate  that  the  loans  of  the 
United  States  will  be  issued  on  an  average  of  a  five  per 
cent,  basis. 

Ten  or  Twenty  Year  Bonds  Preferable 

3.  The  terms  on  which  the  loan  is  to  be  issued  are  not 
fixed  in  the  bill,  but  are  left  entirely  to  the  discretion  of 
the  authorities.  This  is  true,  even  of  the  length  of  the 
loan.  It  is  obvious  that  the  longer  the  loan,  the  more 
favorable  the  conditions  under  which  it  can  be  marketed ; 
but  it  is  true  also  that  long  term  bonds,  say  for  thirty  or 
fifty  years,  are  of  questionable  advisability  in  other 
respects.  In  the  case  of  countries  which  have  no  objec- 
tion to  perpetual  debt,  such  bonds  may  be  defensible;  but 
there  have  always  been  and  are  today  valid  objections 
to  perpetual  debts  in  the  United  States.  Since  every 
generation  may  be  expected  to  have  troubles  of  its  own, 
it  is  clearly  a  part  of  wisdom  for  any  nation,  which  can 
possibly  afford  to  do  so,  to  pay  off  its  debt  within  the 
generation  which  contracted  it.  Our  experiences,  more- 
over, with  the  bonds  which  were  issued  during  the  great 
refunding  operations  after  the  Civil  War,  even  though 
their  length  was  only  thirty  years,  were  sufficiently  dis- 
heartening. Although  there  was  a  large  balance  in  the 
Treasury  during  the  '80's,  we  were  unable  to  pay  off  the 
debt  except  through  the  very  costly  medium  of  buying 
long  term  four  per  cent,  bonds  in  the  market,  often  at  a 
premium  of  from  twenty-eight  to  thirty  per  cent.  The 
government  should  profit  from  this  experience,  and  should 
issue  bonds  to  run  for  not  more  than  ten  years  or,  at  the 
outside,  twenty  years. 

32 


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National  Bank  of  Commerce  in  Ne>v  York 

31      NASSAU     STREET 

Adioining  the  Bank,  on  Cedar  Street,  is  the  New  York  Clearing  House. 
To  the  left  is  the  Equitable  Building,  the  largest  office  building  in 
the  world  and  the  home  of  the  Federal  Reserx'e  Bank  of  New  York 


Provisions  for  Repayment 

Still  more  important,  however,  is  the  arrangement 
for  repayment.  Most  of  the  loans  issued  in  this  country- 
have  been  so-called  'straight'  bonds,  all  of  which  mature 
at  the  same  time,  with  a  more  or  less  adequate  sinking 
fund  system.  The  sinking  fund  provisions  in  our  loans 
of  the  Civil  War  have,  as  is  well  known,  never  been  con- 
sidered of  a  binding  character.  They  have  been  rather 
bookkeeping  devices,  and  the  government  has  paid  off 
from  year  to  year  either  more  or  less  than  the  nominal 
sinking  fund  requirement,  according  as  the  exigencies  of 
the  time  demanded.  In  our  state  finance,  the  abuses  of 
sinking  funds  have  been  very  notorious  of  recent  years 
and  have  led,  in  not  a  few  states,  to  the  introduction  of 
the  so-called  serial  bond  system  whereby  a  certain  propor- 
tion of  the  issue  is  retired  annually.  Almost  no  attention 
has  been  given  in  this  country,  however,  to  other  forms 
of  bond  issues  which  provide  for  retirement  in  either  regu- 
lar or  irregular  instalments.  A  study  of  the  history  of 
public  credit  will  show  that  there  is  a  great  variety  of 
issues  possible,  and  that  many  of  the  methods  practised, 
especially  in  the  local  finance  of  some  of  the  European 
countries,  are  well  worth  consideration  by  our  govern- 
ment. However  that  may  be,  one  conclusion  is  certain, 
namely,  that  from  the  very  time  of  issue  adequate  pro- 
vision should  be  made  for  an  annual  amortization  quota  so 
arranged  that  at  the  expiration  of  the  life  of  the  loan, 
the  entire  debt  will  be  virtually  extinguished.  It  would 
be  deplorable  in  the  extreme  if  such  gigantic  issues  as 
we  have  in  contemplation  were  to  be  made  with  the  simple 
prospect  of  refunding  the  loans  at  some  future  time,  par- 
ticularly, in  view  of  the  strength  of  our  present  economic 
position,  A  perpetual  debt  or  even  a  long  debt  must  be 
avoided. 

Tax  Exemption  Problem 

4.  Finally,  the  question  of  the  exemption  from  taxa- 
tion must  be  considered.  The  argument  in  favor  of 
exempting  loans  from  taxation  is  that  they  will  sell  at  a 

33 


higher  price  and  thus  net  the  government  more  than  they 
otherwise  would.  While  this  argument  is  of  some  weight 
in  times  when  the  credit  of  the  government  is  seriously 
impaired,  at  a  time  like  the  present  it  has  but  little 
force.  Moreover,  the  argument  on  the  other  side  is  far 
stronger.  If,  as  seems  entirely  likely,  a  large  part  of  the 
necessary  revenue  will  have  to  be  raised  by  a  greatly 
enhanced  income  tax,  it  is  the  height  of  injustice  to  divide 
the  population  into  two  classes  and  to  exempt  from  bur- 
dens the  holders  of  government  bonds.  From  the  point 
of  view  of  equality  of  taxation,  there  is  no  warrant  for 
this.  On  the  contrary,  the  investors  in  government  bonds, 
like  investors  in  all  other  forms  of  capital,  enjoy  what  is 
called  in  the  English  tax  an  unearned  income,  and  virtu- 
ally everywhere  in  Europe  an  unearned  income  is  taxed 
at  a  higher  rate  than  an  earned  income.  In  this  country, 
however,  we  should  be  adopting  a  double  injustice:  we 
should  not  be  taxing  the  owners  of  bonds  at  a  higher  rate 
than  the  recipients  of  earned  incomes,  but  we  should  as  a 
matter  of  fact  be  taxing  them  at  a  lower  rate. 

Another  argument  often  advanced  is  that  it  makes 
practically  no  difference  whether  or  not  bonds  are  tax-free. 
For  if  the  purchaser  of  a  government  bond  knows  that 
he  is  to  be  exempt  from  taxation,  this  exemption  will  be 
capitalized  into  a  difference  in  the  selling  price,  and  he  will 
pay  so  much  more  for  the  bond  or — what  is  equivalent  to 
the  same  thing — will  receive  so  much  less  interest.  This 
assumes,  however,  that  it  is  known  in  advance  what  the 
rate  of  the  income  tax  is  going  to  be.  But  in  the  present 
situation  that  is  manifestly  impossible.  The  subscribers 
for  our  proposed  government  bonds  will,  at  a  given  rate 
of  interest,  pay  a  price  which  is  calculated  on  the  exemp- 
tion from  the  present  income  tax,  and  from  an  estimated 
future  income  tax.  But  what  the  increase  in  the  income 
tax  will  be  in  the  near  future  no  one  can  tell,  and  it  is 
obvious  that  this  unknown  increase  of  the  tax  cannot  be 
accurately  capitalized.  Therefore,  to  the  extent  at  least 
of  any  future  unexpected  increase  in  the  income  tax,  the 
holders  of  bonds  will  enjoy  an  unmerited  exemption. 
They  will  not  be  sharing  the  burdens  with  the  rest  of  the 

34 


citizens.     Instead  of  paying  a  higher  tax  on  the  unearned 
income,  the^'  will  be  paying  a  lower  tax. 

Another  Tax  Exemption  Injustice 

Moreover,  to  exempt  the  bonds  from  taxation  will 
cause  injustice  in  yet  another  fashion.  Our  income  tax 
is  now  highly  progressive,  and  in  the  new  income  tax 
the  progression  may  be  made  even  more  pronounced. 
The  bonds,  if  issued  as  proposed  in  the  present  bill,  are 
exempt  in  the  hands  of  the  holder  whether  he  be  a  man 
with  an  income  of  five  thousand  or  five  million  dollars. 
It  can  easily  be  seen  that  the  exemption  provision  will 
have  the  practical  effect  of  nullifying  to  a  considerable 
extent  the  progressive  rate  of  the  income  tax.  The  news- 
papers report  that  the  new  issue  will  be  a  'rich  man's 
loan'  because  of  the  eagerness  of  the  payers  of  the  super- 
tax to  insure  themselves  against  the  probable  increases 
in  taxation.  If  the  entire  issue  were  taken  by  the  tax- 
payers who  fall  in  the  highest  super-tax  group,  if  there 
were  among  them  entire  freedom  of  competition  in  sub- 
scribing for  the  loan,  and  if  there  were  definite  knowledge 
of  what  the  future  would  bring  in  the  way  of  increased 
income  tax  rates — then,  and  then  only,  would  the  exemp- 
tion of  the  bonds  from  taxation  have  any  basis  in  justice. 
These  conditions,  of  course,  cannot  be  met. 

Lessons  of  Recent  English  Loan 

The  lessons  of  the  recent  English  loan  are  very 
significant.  We  are  told  that,  of  the  entire  issue  of  about 
£1,000,000,000,  only  an  insignificant  fraction  was  sub- 
scribed for  in  the  four  per  cent,  tax-free  bonds  and  that 
almost  the  entire  sum  was  subscribed  for  in  the  five 
per  cent,  bonds,  not  free  from  taxation.  This  shows  that 
the  English  investors  prefer  to  take  their  chance  of  a: 
future  reduction  of  the  income  tax  from  the  present  high 
level.  But  it  shows  above  all  that  England  is  on  the  right 
track  in  putting  its  loan  virtually  in  the  shape  of  bonds 
that  are  not  exempt  from  taxation.  The  bondholder 
takes  his  chances  equally  with  the  rest  of  the  community. 


35 


The  American  practice  of  issuing  tax-free  government 
bonds  dates  from  a  time  when  equahty  of  taxation  was 
not  considered  the  controlHng  consideration.  In  the  half 
century  since  the  Civil  War,  great  progress  has  been  made 
in  the  realization  of  this  conception,  and  almost  uniformly 
abroad  the  tax-free  provision  has  been  eliminated  from 
government  issues.  It  is  high  time  that  this  should  be 
done  also  in  this  country.  The  present  bill,  unfortunately, 
makes  only  a  slight  concession  to  this  demand.  It  makes 
the  new  government  bonds  liable  to  the  estate  tax.  But 
the  logic  of  this  exception  would  impel  to  the  total  aban- 
donment of  the  entire  tax-free  clause.  In  its  present  form 
the  provision  is  both  illogical  and  unjust. 

III.  TAXATION 

According  to  our  calculations,  $1,500,000,000  of  addi- 
tional revenue  will  have  to  be  raised  this  year,  and  some 
$3,000,000,000  the  following  year  if  we  are  to  do  our  full 
share  in  the  war,  and  at  the  same  time  to  avoid  shifting 
the  burden  too  far  into  the  future. 

The  reasons  for  heavy  levies  of  taxes  are  clear.  In  the 
first  place,  it  is  always  easier  to  impose  severe  burdens 
upon  a  community  at  a  time  when  feelings  of  loyalty  are 
aroused.  Sacrifices  are  then  made  willingly  which  in 
ordinary  times  would  cause  much  complaint.  The  capi- 
talization of  patriotism  in  this  fashion  for  the  accomplish- 
ment of  national  tasks  is  the  height  of  financial  wisdom. 

The  actual  burden  of  taxes,  moreover,  in  time  of  war 
is  less  than  it  appears  to  be.  Not  only  are  immense  profits 
secured  by  the  war  contracts  apt  to  be  more  or  less  diffused 
throughout  the  community  in  the  shape  of  high  wages 
and  a  greater  demand  for  materials,  but,  in  addition,  the 
higher  level  of  prices  which  usually  accompanies  war 
makes  a  given  tax  a  much  smaller  actual  proportion  of 
consuming   power   than   under   ordinary   circumstances. 

Finally,  from  the  general  economic  point  of  view,  it 
is  far  better  to  levy  high  taxes  during  a  war,  when  the 
social  income  is  great,  and  the  diversion  of  income  to 
ordinary    investment   of   capital    relatively    small,    than 

36 


to  postpone  the  taxes  necessary  to  sink  the  debt  until 
after  the  war,  when  the  need  of  capital  investment  will 
again  become  acute. 

Taxation  and  Sound  Economics 

From  every  point  of  view,  therefore,  as  much  money 
ought  to  be  raised  during  the  war  by  taxation  as  is  con- 
sistent with  a  sound  economic  progress.  According  to 
our  analyses,  it  is  desirable  to  raise  as  much  as  $1,500, - 
000,000  this  year  and  $3,000,000,000  the  following  year. 
But  how  is  such  a  gigantic  sum  of  money  to  be  secured? 
What  are  the  possible  sources  of  revenue .? 

In  former  wars,  both  in  Europe  and  in  America,  where 
the  accumulation  of  wealth  was  comparatively  small,  and 
where  the  ideas  of  equality  of  taxation  had  not  yet  per- 
meated the  popular  mind,  it  was  possible  to  elaborate  a 
system  of  taxation  which,  to  a  great  extent,  perpetuated 
the  traditional  system.  This  traditional  system  burdened 
primarily  the  consumption  of  the  community  and 
exempted  its  productive  wealth.  With  the  progress  of 
democratic  conceptions  in  taxation,  all  this  has  been 
changed.  Of  late,  more  and  more  stress  has  come  to  be 
laid  on  the  idea  of  income  and  property  and  less  on  the 
criterion  of  expenditure.  If  we  look  at  the  practical 
possibilities  of  our  American  system,  in  the  light  of  recent 
European  experience,  we  shall  see  that  there  are  only  five 
possible  sources  of  war  taxation,  each  of  which  will  be 
considered  in  turn. 

1.  The  Property  Tax 

The  attempt  to  raise  any  large  sum  by  the  taxation 
of  property  as  such  may  be  eliminated  from  considera- 
tion. For  familiar  reasons,  which  need  not  be  recounted 
here,  the  general  property  tax  has  everywhere  broken 
down  in  our  state  and  local  finance.  It  has  become,  in 
large  part,  a  taxation  of  real  estate,  whereas  what  is 
needed  at  the  present  time  is  primarily  a  taxation  of 
personal  property  and  especially  of  intangible  wealth. 
We  have  no  taxing  machinery  in  the  federal  government 

37 


and  it  would  probably  be  impossible  to  devise  any  machin- 
ery which  would  make  a  property  tax  an  administrative 
success.  The  only  one  of  the  warring  countries  which  has 
made  the  attempt  to  levy  a  large  property  tax  is  Germany 
where,  for  special  reasons,  a  workable  scheme  of  assessing 
property  values  has  been  elaborated  in  the  course  of  the 
last  few  decades.  Even  in  England  this  has  not  been 
attempted.  In  the  United  States  this  whole  plan  may, 
for  the  immediate  future  at  least,  be  dismissed  as  im- 
practicable. 

2.  The  Inheritance  Tax 

The  present  estate  tax  as  modified  by  the  legislation 
of  a  few  weeks  ago,  is  calculated  to  produce  $100,000,000. 
It  is  a  tax  at  progressive  rates,  graded  from  one  to  fifteen 
per  cent.  The  English  system  of  death  duties,  with  rates 
considerably  higher  and  w^ith  a  far  lower  limit  of  exemp- 
tion, produces  about  $150,000,000  a  year.  There  is  no 
doubt  that  we  could  also  secure  a  considerable  augmenta- 
tion of  the  yield  by  lowering  the  present  exemption  of 
$50,000.  But  in  contemplating  a  great  increase  in  the 
progressive  scale  of  the  estate  tax,  it  would  be  necessary 
to  remember  that  there  are  also  state  taxes  on  inheri- 
tances, the  rates  of  which  in  some  cases  run  up  to  fifteen 
per  cent.  At  present,  therefore,  in  parts  of  this  country, 
we  already  have  a  system  of  inheritance  taxes  up  to  thirty 
per  cent.,  a  scale  which  is  appreciably  higher  than  any- 
thing existing  in  the  great  European  countries.  Any 
attempt  considerably  to  increase  the  rates  of  the  inherit- 
ance tax  would  have  to  be  attended  by  at  least  two 
modifications.  In  the  first  place,  there  would  have  to  be 
some  sort  of  accommodation  between  state  and  federal 
taxation  of  inheritances,  with  a  provision  that  those  states 
which  derive  a  large  revenue  from  this  source  should 
be  compensated  in  some  way.  In  the  second  place,  if  the 
rates  were  to  be  made  very  much  higher  than  at  present, 
it  would  be  necessary  to  introduce  the  system  now  in 
vogue  in  some  other  countries,  guaranteeing  against  a 
repeated  payment  of  the  tax  on  the  same  estate  within 

38 


a  few  years,  if  by  chance  the  existing  successive  owners 
should  die  within  a  short  period  of  each  other. 

Taking  all  these  facts  into  consideration,  it  is  not 
likely  that  any  practicable  change  in  the  inheritance  tax, 
even  though  it  involved  both  an  increase  of  the  graduated 
scale  and  a  decrease  of  the  exemption,  would  net  more 
than  one  hundred  millions  of  additional  revenue. 

3.  The  Income  Tax 

The  federal  income  tax  this  coming  year  is  expected 
to  yield  about  $250,000,000,  approximately  the  same 
amount  that  Great  Britain  raised  through  her  income 
tax  before  the  war.  The  income  tax  in  Great  Britain 
is  expected  to  yield  this  year  about  $1,000,000,000,  that 
is,  about  $750,000,000  more  than  before  the  war.  The 
question  then  arises:  Can  we  not  do  the  same?  In  what 
way  can  we  also,  possibly,  quadruple  the  revenue  from 
our  income  tax?  This  is  an  interesting  but  a  difficult  field 
of  inquiry. 

It  is  undoubtedly  true  that  our  social  income  is  very 
much  larger  than  that  of  England.  Before  the  war,  the 
English  wealth  was  roughly  estimated  at  about  $80,000,- 
000,000,  the  German  wealth  at  about  $85,000,000,000, 
and  our  wealth  at  about  $200,000,000,000  (the  official 
figures  for  1912  were  $187,000,000,000).  All  such  esti- 
mates are  indeed  of  the  vaguest  possible  character.  But 
taking  them  for  what  they  are  worth,  it  would  follow  that 
the  income  of  the  United  States  would  be  about  two  and 
one-half  times  that  of  Great  Britain,  making  no  allowance 
for  a  possible  higher  percentage  of  expected  as  compared 
with  realized  income  in  the  United  States.  If,  therefore, 
we  had  the  same  rates  of  the  income  tax  as  in  England, 
it  might  be  claimed  that  our  revenue  ought  to  be  two 
and  one-half  times  as  great.  Two  important  facts,  how- 
ever, must  be  remembered.  In  the  first  place,  the  exemp- 
tion from  the  income  tax  in  England  is  £130  or  $650, 
whereas  our  exemption  from  the  income  tax  is  virtually 
$4,000.  Far  more  significant  than  this,  however,  is  the 
fact  that  in  an  industrial  country  like  England  the  great 

39 


mass  of  the  total  incomes  is  derived  from  industry  and 
trade,  and  that  even  the  incomes  from  land  are  paid  in 
great  part  by  the  large  landowners.  In  the  United  States, 
however,  the  great  mass  of  incomes  arise  from  agriculture 
and  are  small  in  amount.  Of  all  incomes,  small  farmers' 
incomes  are  proverbially  the  most  refractory.  In  the 
statistics  of  the  Wisconsin  income  tax  published  by  the 
state  tax  commission,  it  appears  that  in  1916  the  farmer 
paid  only  3.86%  of  the  state  income  tax,  as  over  against 
20.30%  paid  by  manufacturers  and  27.23%  paid  by 
merchants  and  bankers.  If  Wisconsin  may  be  taken  as  a 
fairly  typical  state,  it  is  obvious  that  an  immense  deduc- 
tion from  the  taxable  income  must  be  made  for  the  agri- 
cultural incomes  of  the  United  States.  It  would  not  be 
at  all  safe  to  argue  from  British  to  American  conditions. 

Effect  of  Tax  Exemption  Redaction 

It  is  important,  however,  to  raise  the  question  as  to 
how  much  additional  income  tax  could  be  secured  by  a 
considerable  reduction  of  the  exemption.  Here  again  a 
surprise  awaits  us.  Of  the  total  income  tax  in  the  year 
1914-1915,  amounting  to  some  $124,000,000,  the  propor- 
tions raised  were,  in  round  numbers,  as  follows: 

Corporation  tax $56,994,000 

Individual  tax: 

Normal  tax 23,996,000 

Additional  tax 43,684,000 

In  other  words,  the  additional  tax  was  almost  twice 
as  large  as  the  normal  tax. 

The  additional  tax  was  subdivided  according  to  the 
following  categories: 

Incomes  from  $20,000  to  $100,000  $13,706,000 
Incomes  from  100,000  to  500,000  17,330,000 
Incomes  over     500,000  12,648,000 

Wisconsin  Income  Tax 

The  Wisconsin  tax  statistics  show  that  the  taxpayers 
with  incomes  up  to  $4,000  paid  a  tax  of  $517,520  out 

40 


of  a  total  tax  on  all  individuals  of  $1,601,213.  That  is 
to  say,  with  an  income  tax  exemption  of  only  $800,* 
about  one-third  of  the  tax  was  paid  by  recipients  of 
incomes  under  $4,000.  It  is  manifestly  out  of  the  ques- 
tion, however,  to  assume  that  the  federal  exemption  will 
be  reduced  to  as  low  as  $800.  If  we  take  $1,500  as  the 
lowest  probable  figure  of  exemption  from  the  federal 
income  tax,  we  find  that,  to  judge  from  the  Wisconsin 
figures,  we  should  be  adding  only  about  sixteen  per  cent, 
or  one-sixth  to  the  receipts  from  the  income  tax.  In 
England,  on  the  other  hand,  the  proportion  of  taxes  paid 
by  the  relatively  lower  incomes  in  certain  schedules  is 
considerably  greater.  In  1914,  these  were  the  figures  for 
the  taxable  income  of  certain  taxpayers  in  schedules  D 
and  E,  that  is,  the  ordinary  commercial  and  industrial 
incomes. 

Income  Gross  Taxable  Income 

Below  £300  £49,112,279 

£300  to  £600  25,421,620 

£600  to  £800  6,309,844 

Total £80,843,743 

All  incomes £115,363,615 

British  Income  Tax 

In  other  words,  in  these  particular  schedules,  over 
two-thirds  of  the  taxable  income  was  found  in  the  case 
of  individuals  with  an  income  under  £800  or  $4,000. 
£800  in  England,  however,  probably  means  relatively 
more  than  $4,000  in  the  United  States.  The  above  figures 
apply,  moreover,  only  to  partial  incomes  in  a  particular 
category.  It  is  entirely  probable,  therefore,  that  the 
additional  revenue  to  be  expected  by  a  reduction  of  the 
exemption  would  be  very  much  closer  to  the  one-sixth,  as 
represented  by  the  Wisconsin  figures,  than  to  the  two- 
thirds,  represented  by  the  English  figures.  Thus,  for 
every  one  per  cent,  of  income  tax,  which,  as  we  have  seen, 
meant  about  $24,000,000  last  year,  it  would  not  be  safe  to 
add  more  than  a  third  for  the  additional  revenue  to  be 

1  $1,200  for  man  and  wife. 

41 


secured  by  the  reduction  of  the  exemption  to  $1,500. 
In  other  words,  for  every  one  per  cent,  of  income  tax, 
the  normal  tax  would  represent  about  $32,000,000,  instead 
of  $24,000,000. 

How  Heavily  Shall  We  Tax  Large  Incomes? 

The  English  income  tax  is  now  levied  at  a  rate  of  from 
about  twelve  per  cent,  to  a  rate  amounting  to  about 
thirty-four  per  cent,  on  the  highest  incomes.  If  our  nor- 
mal rate  were  to  be  ten  per  cent.,  instead  of  the  existing 
rate  of  two  per  cent.,  the  revenue  from  the  normal  tax  on 
individuals  would  be  about  $240,000,000,  if  we  kept  the 
present  exemption  (ten  times  the  yield  of  last  year  at  one 
per  cent.),  or  some  $320,000,000  with  a  reduction  of  the 
exemption  to  $1 ,500.  As  against  the  fifty  millions  awaited 
this  year  from  the  two-per  cent,  normal  tax,  this  would 
mean  an  additional  revenue  of  some  $250,000,000.  How- 
ever, if  the  same  rate  of  ten  per  cent,  were  applied  to  the 
corporation  tax,  we  should  get  another  $500,000,000. 
The  additional  tax  still  remains  as  a  resource.  With  the 
rates  running  up  to  six  per  cent,  last  year,  it  yielded 
$43,000,000;  yet  the  total  estimated  revenue  of  the  income 
tax  for  the  present  year,  with  a  normal  tax  double  the  year 
before,  and  with  an  additional  tax  running  up  to  thirteen 
per  cent.,  is  expected  to  be  only  about  twice  as  great.  In 
order,  therefore,  to  secure  any  very  large  revenue  from 
the  additional  tax,  the  rates  would  have  to  be  increased 
considerably  above  the  present  figures.  In  order  to  secure 
$200,000,000  or  $300,000,000  from  the  additional  tax, 
the  rates  of  the  additional  tax  would  have  to  run  up  to 
thirty-five  or  forty  per  cent.,  which,  added  to  the  normal 
tax  of  ten  per  cent.,  would  mean  a  rate  of  some  fifty  per 
cent,  on  the  highest  incomes. 

It  follows,  therefore,  that  if  we  try  to  secure  an  addi- 
tional revenue  of  $1,000,000,000  from  the  income  tax, 
it  would  be  necessary  to  reduce  the  exemption  to  $1,500, 
to  make  the  normal  rate  about  ten  per  cent,  and  to  gradu- 
ate the  additional  rate  up  to  forty  per  cent,  (or  a  total  of 
fifty  per  cent.).    This  is  very  much  higher  than  what  exists 

42 


in  England  at  the  present  time,  and  probably  fully  as 
high  as  could  be  well  endured.  Moreover,  with  such  rates, 
it  would  be  imperative  to  make  a  distinction,  as  the  Euro- 
pean countries  do,  between  earned  and  unearned  incomes, 
taxing  the  unearned  incomes  at  a  lower  rate.  This  would 
considerably  reduce  the  revenue  from  the  tax.  Finally, 
another  notable  diminution  of  the  yield  would  follow  the 
unfortunate  exemption  of  interest  on  the  new  and  gigantic 
war  debt.  With  every  billion  dollars  of  new  tax-free  debt 
there  would  be  a  reduction  of  from  ten  to  twenty  millions 
in  the  yield  of  the  income  tax. 

General  Conclusion  on  Income  Tax 

The  general  conclusion,  therefore,  is  that  it  would 
be  practicable  to  secure  an  additional  revenue  of  perhaps 
$750,000,000  from  the  income  tax  by  a  system  which 
would  grade  the  tax  from  about  ten  per  cent,  on  moderate 
incomes  up  to  forty  per  cent,  on  the  highest  incomes,  and 
with  a  proportionate  reduction  of  the  rate  on  lower  in- 
comes down  to  $1,500.  But  the  adoption  of  such  an 
extremely  high  income  tax  would  call  for  the  greatest 
care  in  recasting  certain  features  of  the  law  which  even 
now%  with  a  low  rate,  are  producing  inequality  and  dis- 
content. 

4.  Excess-Profits  Tax 

Since  the  inheritance  tax  will  yield  comparatively 
little,  and  since  the  income  tax  can  be  counted  on  for  only 
$750,000,000  of  additional  revenue,  recourse  must  be  had 
to  a  method  that  has  been  employed  in  Canada,  Australia 
and  almost  everywhere  in  Europe  and  which  is  already 
being  used  to  a  certain  extent  in  the  United  States,  viz., 
the  taxation  of  excess  profits.  Last  September,  Congress 
passed  an  act  placing  a  levy  of  twelve  and  one-half  per 
cent,  on  the  net  profits  of  munition  manufacturers.^  Only 
a  few  weeks  ago,  there  was  added  to  this  a  small  tax  on 
excess  profits  in  general. 

1  In  the  case  of  the  munition  manufacturers'  tax,  the  levy  is  made  against 
all  net  profits  without  the  eight  per  cent,  allowance. 

43 


Much  might  be  said,  in  this  connection,  concerning 
the  desirabihty  of  government  action  in  the  direction  of 
price  control,  particularly  the  control  of  the  prices  of  war 
materials.  The  enormous  purchases  soon  to  be  made  will 
be  a  disturbing  element  in  the  market  situation — one 
which  will  destroy  many  of  the  ordinary  safeguards  of 
free  competition.  Price  regulation,  which  would  effec- 
tively restrict  prices  to  a  point  near  the  cost  of  production, 
would  be  preferable  to  high  prices,  high  profits  and  a  high 
excess-profits  tax.  Price  regulation  would  mean  a  dimi- 
nution, of  course,  in  the  fiscal  results  of  the  excess-profits 
tax. 

Our  Excess-Profits  Tax  upon  an  Arbitrary  Basis 

There  is  a  great  and  important  difference  between  the 
European  taxes  and  our  own  excess-profits  tax.  All  of 
the  European  laws  measure  taxable  profits  by  comparing 
present  profits  with  the  average  profits  of  business  before 
the  war  began;  in  some  cases  this  average  is  taken  for  a 
number  of  years.  Our  law,  however,  takes  the  arbitrary 
figure  of  eight  per  cent,  on  the  "capital  invested"  (plus 
$5,000)^  as  the  normal  profit  and  taxes  everything  above 
that  eight  per  cent. 

This  arbitrary  method  is  unfair  both  to  investors  and 
to  industry.  Especially  in  a  comparatively  new  country 
like  the  United  States,  where  risks  are  great  and  losses 
frequent,  a  profit  of  more  than  eight  per  cent,  is  often 
necessary  to  justify  investment.  At  the  present  rate, 
the  situation  is  not  serious;  but  with  the  necessity  of 
levying  a  far  higher  rate,  the  continuance  of  our  present 
method  would  involve  us  in  difficulties.  At  a  period  like 
the  present,  it  is  of  the  first  importance  not  to  put  a 
check  upon  business  enterprise  or  to  cripple  the  desire 
of  individuals  to  do  their  utmost  in  the  way  of  productive 
capacity.  The  principle  of  taxing  very  heavily  excess 
profits  above  normal  peace  profits  is  indeed  defensible; 
but  to  penalize  all  profits  above  eight  per  cent,  applied  to 

1  "Capital  invested"  is  defined  to  include  cash  paid  in,  the  cash  value  at 
the  time  of  payment  of  capital  represented  by  property  and  surplus  invested  in 
the  business. 

44 


a  base  such  as  that  prescribed  in  our  present  law  can 
scarcely  be  defended.  Instead  of  bringing  any  more 
revenue,  a  larger  rate  upon  such  excess  profits  might 
yield  actually  less  revenue,  in  addition  to  placing  an  unfair 
burden  upon  a  particular  class  of  investors.  It  cannot  be 
emphasized  too  strongly,  therefore,  that  if  we  are  to  have 
a  high  excess-profits  tax,  we  should  follow  the  European 
principle  and  abandon  the  arbitrary  methods  now  being 
followed. 

Probable  Returns  from  Excess-Profits  Tax 

The  yield  of  the  present  law  is  problematical,  but  it 
has  been  roughly  calculated  that  the  returns  will  be 
between  $200,000,000  and  $225,000,000.  A  very  vague 
estimate,  made  some  time  ago,  figured  that  the  excess 
profits  last  year  were  about  $5,500,000,000,  but  that  the 
deductions  and  exemptions  in  the  law  reduce  the  taxable 
excess  profits  to  some  $3,000,000.  In  Great  Britain,  the 
excess-profits  tax  was  estimated  to  yield  in  the  fiscal  year 
just  ended  between  $400,000,000  and  $500,000,000.  But 
it  will  probably  yield  between  $600,000,000  and  $700,000,- 
000.  The  English  tax  is  levied  at  the  rate  of  sixty  per 
cent.  While  our  excess  profits  have  been  exceedingly 
great,  it  is  doubtful  whether  they  have  been  much  larger 
than  in  England  where  the  profits  have  come  not  only 
from  the  war  expenditures,  but  also  from  the  immensely 
enhanced  returns  from  shipping.  In  order  to  secure 
$500,000,000  more  from  the  excess-profits  tax  in  this 
country,  it  would  be  necessary,  assuming  that  the  sug- 
gested change  be  made  in  the  base  line  from  which  to 
measure  the  excess  of  profits,  to  increase  the  rate  to  forty 
or  fifty  per  cent.  It  might  be  advisable  to  take  as  a  basis, 
not  only  the  profits  of  the  current  year,  but  the  average  of 
the  excess  profits  of  the  last  two  or  three  years,  in  which 
case  the  yield  would  be  largely  increased. 

5.  Indirect  Taxes 

If  the  rates  of  the  income  tax  and  of  the  excess-profits 
tax  were  raised  to  the  height  suggested  during  the  first 

45 


year,  sufficient  revenue  might  be  obtained  for  the  needs 
of  that  year  without  other  taxes.  It  is  possible,  of  course, 
that  much  more  might  be  obtained  than  has  been  esti- 
mated. At  any  rate,  valuable  experience  would  be  gath- 
ered and  a  more  definite  basis  for  future  calculations 
would  be  made  available.  If  the  machinery  of  direct 
taxation  appeared  to  be  in  no  danger  of  breaking  down,  it 
might  be  possible  even  to  make  further  increases  in  rates. 
If,  on  the  contrary,  the  yield  of  the  first  year's  taxes  was 
disappointing,  or  if  it  seemed  wise  not  to  raise  the  rates 
to  the  suggested  maximum  at  once,  there  would  still 
remain  the  whole  field  of  indirect  taxation. 

Increase  in  Taxes  Abroad 

It  is  perhaps  significant  that  all  of  the  warring  coun- 
tries have  found  direct  taxation  alone  to  be  insufficient. 
In  Germany,  where  immense  additions  have  been  made  by 
the  localities  and  the  separate  states  to  the  income  taxes, 
the  federal  government  has  imposed  large  burdens,  not 
only  on  excess  profits,  but  also  through  indirect  taxes. 
The  same  is  true  to  a  still  greater  extent  in  France.  In 
England  also,  the  revenue  from  indirect  taxes,  and  espe- 
cially from  customs  and  excise,  has  been  very  largely 
increased  as  appears  from  the  following  figures: 

Tax  1914  1916 

Customs  £35,569,000  £57,707,000 

Excise  39,658,000  61,210,000 

The  figures  for  1917  are  not  yet  available,  but  they 
are  expected  to  show  a  further  increase.  In  other  words, 
England  has  secured  an  additional  revenue  of  about 
$250,000,000  from  the  customs  and  excise  duties  alone, 
having  imposed  higher  taxes  on  tea,  sugar,  coffee,  railway 
tickets,  and  a  variety  of  other  items.  In  the  United  States, 
our  revenue  from  the  tariff  is  about  $100,000,000  less  than 
the  British  revenue  from  her  free-trade  tariff. 

Our  Civil  War  Experience 

Our  Civil  War  experience  indicates  the  rich  produc- 
tivity of  indirect  taxation.     If  we  were  to  tax  certain 

46 


articles  at  the  rates  customary  in  the  Civil  War,  it  would 
be  easy  to  secure  an  immensely  enhanced  revenue.  From 
calculations  which  were  printed  in  a  detailed  table 
appended  to  the  recent  report  of  the  Committee  on  the 
Relations  of  State  and  Federal  Taxes,  submitted  in  Janu- 
ary to  the  Seventh  Annual  New  York  State  Conference 
on  Taxation,  it  appears  that  the  revenue  from  certain 
taxes  on  commodities,  if  levied  at  Civil  War  rates,  would, 
during  the  coming  year,  be  about  as  follows: 

Source  Estimated  Revenue  in  1917 

Tobacco  $305,000,000 

Distilled  spirits  272,000,000 

Petroleum  282,000,000 

Cotton  120,000,000 

Iron  and  steel  manufactures  122,000,000 

Cotton  goods  53,000,000 

Woolen  goods  36,000,000 

Boots  and  shoes  44,000,000 

Coal  31,000,000 

Railroad  passenger  tickets  82,000,000 

Leather  26,000,000 

Moreover,  it  may  be  recalled  that  in  1916  some 
$42,000,000  was  raised  in  the  United  States  by  stamp 
taxes.  This  source  yielded  England  about  $35,000,000 
last  year.  Probably  as  much  as  $75,000,000  could  be 
collected  by  such  a  tax  without  making  the  rates  exor- 
bitantly high. 

This  list  could  be  extended  almost  indefinitely. 

While  it  is  obvious  that  it  would  be  unwise  to  levy  all 
or  even  a  large  proportion  of  these  taxes,  it  is  clear  that 
certain  commodities  might  be  chosen  and  that  the  tax 
might  be  so  graduated  as  to  fall  primarily  on  the  better 
qualities  of  the  goods  rather  than  on  the  necessities. 

In  any  event,  it  would  be  comparatively  easy  to  raise 
a  few  hundred  million  dollars  from  such  indirect  sources. 
This  system,  as  a  supplement  to  the  vastly  more  impor- 
tant direct  taxes,  would  probably  suffice  for  the  first  year 
or  two  of  the  war.  Were  the  war  to  continue  for  a  longer 
period,  it  would  be  necessary,  of  course,  to  revise  all  our 
calculations. 

47 


Conclasion 

In  conclusion,  it  may  be  pointed  out  that  since  this 
war  is  being  prosecuted  on  a  gigantic  scale,  our  expendi- 
tures and  our  revenues  must  be  expected  to  be  on  the 
same  scale.  All  preceding  ideas  on  the  subject  must  be 
thrown  in  the  scrap  heap,  together  with  the  similar  views 
as  to  the  military  conduct  of  the  war.  Of  one  thing,  how- 
ever, we  may  be  assured.  The  prodigious  wealth  and  the 
unexampled  prosperity  of  the  United  States  ought  to 
leave  no  doubt  as  to  our  ability,  not  only  to  finance  the 
war,  but  to  finance  it  successfully  and  equitably.  But  in 
the  utilization  of  our  enormous  resources,  it  be- 
comes all  the  more  important  to  develop  a  system 
which  will  conform  to  sound  economic  principles 
and  which  will  be  in  harmony  with  modern  ideas 
of  equality  and  justice. 


48 


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PART   III. 


Financial  Management  of  a  War 


Financial  Management  of  a  War* 

By  UENRY  C.  ADAMS.  Ph.  D..  LL.  D.  t 

The  prosecution  of  a  war  of  such  magnitude  as  to  call 
for  large  expenditure  of  money,  imposes  upon  the  minister 
of  finance  the  duty  of  adopting  a  policy  for  the  manage- 
ment of  the  public  treasury.  Under  modern  industrial 
conditions,  however,  his  choice  is  quite  restricted,  for 
there  are  but  three  proposals  which  it  is  worth  his  while  to 
consider.     These  proposals  are  as  follows: 

1.  The  entire  war  expenditure  may  be  drawn  from 
newly-levied  taxes.  In  the  administration  of  this  policy 
the  only  loans  required  are  loans  in  anticipation  of  tax  re- 
ceipts, in  order  to  cover  the  demands  upon  the  treasury 
during  the  period  in  which  the  new  revenue  system  is  be- 
coming operative. 

2.  The  entire  expenditure  of  the  war  may  be  met  from 
the  proceeds  of  loans.  In  this  case  there  is  a  call  for  new 
taxes  equal  to  the  interest  upon  the  loans  contracted. 
Sometimes  even  interest  payments  are  met  by  selling  new 
bonds,  but  this  is  so  manifestly  at  variance  with  sound 
rules  of  finance  that  it  need  not  be  considered. 

3.  The  extraordinary  expenditure  entailed  by  the  war 
may  come  from  a  reasonable  union  of  these  two  sources  of 
revenue — loans  and  taxes.  The  important  question  pre- 
sented by  this  policy  pertains,  of  course,  to  the  nature  of 
the  union  proposed,  and  to  the  ratio  of  proceeds  by  loans  to 
proceeds  from  taxes;  and  it  is  further  necessary  to  inquire 
if  this  ratio  is  the  same  for  all  stages  of  the  war. 

It  must  be  remembered  throughout  the  investigation, 
in  this  manner  laid  before  us,  that  our  problem  has  prima- 
rily to  do  with  extraordinary  expenditure — that  is  to  say, 
with  expenditure  over  and  above  the  demands  of  peace. 


♦Copyright  by  D.  Appleton  and  Company. 

t  Henry  Carter  Adams,  who  has  been  Professor  of  Political  Economy  and  Finance  at  the 
University  of  Michigan  since  1887,  is  the  author  of  several  books  on  economic  subjects.  He  was 
President  of  the  American  Economic  Association,  1895-97.  Professor  Adams  took  his  A.  B. 
degree  at  Iowa  College  in  1874  and  his  Ph.  D.  at  Johns  Hopkins  in  '78.  He  holds  LL.  D.  degrees 
from  Iowa  College  in  1898  and  the  University  of  Wisconsin  in  1903.  He  was  formerly  Associate 
Professor  of  Political  Science  in  Cornell  University,  was  Director  of  the  Division  of  Transporta- 
tion ot  the  11th  Census,  and  Statistician  ot  the  Interstate  Commerce  Commission,  1887-1911. 

51 


Nor  does  this  properly  present  the  extent  of  the  treasury 
problem.  It  is  more  than  likely  that  some  of  the  ordinary 
sources  of  revenue  will  be  cut  off  by  a  state  of  war,  so  that 
new  ways  of  securing  money  must  be  opened  to  cover  the 
deficits  in  permanent  demands.  An  adequate  financial 
policy,  therefore,  must  be  more  than  sufficient  to  make 
headway  against  war  expenditures. 

Shall  the  entire  extraordinary  expenditure 
entailed  by  a  war  be  met  by  an  exercise  of  the 
taxing  power? 

This  question  brings  us  at  once  into  the  presence  of  a 
claim  respecting  which  there  is  great  diversity  of  opinion. 
There  are  those  who  assume,  without  proof  or  argument, 
that  a  people  engaged  in  an  exhaustive  conflict  are  unable 
to  bear  any  marked  increase  in  taxation  so  long  as  the  con- 
flict shall  continue.  There  are  others  who,  stopping  short 
of  this  extreme  claim,  yet  urge  it  as  highly  desirable  that 
the  burden  of  a  war  should  be  distributed  over  several 
generations.  From  such  premises  the  adoption  of  the  loan 
policy  must  logically  follow.  As  opposed  to  such  opin- 
ions, there  are  writers  of  respectability  and  standing  in 
finance  who  deny  the  inability  of  a  people  to  meet  within 
the  year  all  necessary  expenditures,  and  who  refuse  assent 
to  the  time-honored  argument  that  by  a  loan  the  burden 
of  a  war  may  be  distributed.  Such  writers  claim  that  the 
generation  engaged  in  the  contest  must  bear  the  burden  of 
its  expense;  that  this  burden  can  in  no  manner  be  be- 
queathed ;  but  that,  if  the  war  entail  a  debt  upon  the  fol- 
lowing generations,  its  burden  is  borne  twice — once  by  the 
fathers  who  furnished  the  capital  that  was  destroyed,  and 
once  by  the  sons  who  furnished  the  money  to  expunge  the 
debt.  Although  this  latter  conception  of  war  expenditure 
does  not  appear  to  me  to  be  quite  accurate,  it  is  yet  based 
upon  the  manifest  truth  that  each  generation  must  subsist 
upon  the  product  of  its  own  industry.  No  father  can  eat 
the  potatoes  to  be  hoed  by  an  unborn  son,  nor  can  an  army 
live  on  bread  to  be  delivered,  at  the  option  of  the  baker, 
between  ten  and  forty  years  from  the  date  of  the  contract. 
It  is  thus  the  production  of  the  past  and  the  present,  and 

52 


not  that  of  the  present  and  the  future,  which  furnishes 
the  required  capital  for  a  war. 

Such  a  statement  of  truisms,  however,  is  no  final  argu- 
ment in  favor  of  the  taxing  policy,  nor  does  it  meet  fairly 
the  claim  of  those  who  say  that  by  means  of  loans  the  bur- 
den of  a  conflict  may  in  part  be  thrown  upon  posterity. 
They  who  claim  that  war  expenditure  should  be  entirely 
met  from  the  proceeds  of  taxes  fail  to  recognize  two  very 
important  facts.  In  the  first  place,  they  fail  to  understand 
the  difference  between  capital  expended  in  a  war  and  the 
burden  entailed  upon  the  citizens  of  a  country  by  a  war. 
The  consumption  of  capital  may  or  may  not  give  rise  to 
the  consciousness  of  extraordinary  expenditure  on  the  part 
of  the  state,  according  as  it  does  or  does  not  effect  invol- 
untary privation.  The  real  burden  of  a  war  consists  in  the 
fact  that  men  are  deprived  of  property  without  the  com- 
pensation of  hope.  In  the  second  place — and  here  lies  the 
kernel  of  the  argument — they  fail  to  perceive  that  the 
most  important  factor  for  the  financier  is  not  the  material 
but  the  psychological  factor.  It  stands  as  a  first  principle 
in  an  adequate  war  policy  that,  however  great  may  be  the 
demand  for  a  current  year,  it  should  be  met  in  such  a 
manner  that  the  source  from  which  supply  is  drawn  may 
never  be  exhausted.  The  appeal  of  the  financier  to  the 
industrial  producers  should  be  made  in  such  alluring  lan- 
guage that,  while  continually  giving  of  their  product  to  the 
state,  their  energy  will  never  be  slackened.  The  fund  of 
current  product,  from  which  all  revenue  is  drawn,  should 
be  as  unfailing  as  the  widow's  cruse  of  oil. 

It  may  appear  at  first  glance  that  the  realization  of 
this  principle  in  actual  treasury  management  is  impossi- 
ble; but  it  is  perfectly  feasible,  provided  only  a  proper 
financial  policy  be  adopted.  It  is  an  error  to  suppose  that 
current  consumption  in  time  of  war  is  largely  increased 
over  average  consumption  in  time  of  peace.  Public  con- 
sumption may  be  greater,  but  private  expenditure  is  cur- 
tailed. Unless  mercenaries  are  brought  from  abroad,  no 
more  of  the  necessaries  of  life  are  required  than  before  the 
mobilization  of  the  army,  and  on  the  average  such  as  are 
consumed  will  be  of  no  better  quality.     To  balance  the 

53 


increase  of  capital  required  for  the  manufacture  of  arms, 
powder,  ships,  and  the  Hke,  there  is  a  decrease  in  the 
rapidity  with  which  capital  is  invested  in  forms  adapted  to 
peace  employments.  It  is,  however,  necessary  to  notice 
that  average  production  can  only  be  maintained  by  un- 
usual exertion  on  the  part  of  non-belligerents,  for  the  ranks 
of  peace  workers  will  have  been  depleted  by  enlistments  in 
the  army.  This  call  for  increased  activity  is,  in  reality, 
the  first  tax  sustained  by  those  who  continue  to  follow  the 
common  pursuits  of  life.  But  this  tax  need  not  be  the 
occasion  of  solicitude,  for  common  habit  may  be  relied 
upon  to  tide  over  this  first  draft  of  men  from  the  industrial 
ranks.  A  farmer  who,  with  three  sons,  has  been  accus- 
tomed to  cultivate  a  section  of  land,  will  not  permit  a  hun- 
dred and  sixty  acres  to  lie  fallow  because  one  of  his  sons 
has  joined  the  army.  It  is  a  truth  of  quite  general  applica- 
tion that  men  are  disinclined  to  fall  below  a  standard  once 
achieved;  and  it  is  upon  the  principle  of  human  nature 
which  this  truth  discloses  that  the  financier  may  rely  for 
the  maintenance  of  average  production,  notwithstanding 
the  reduction  in  laboring  force. 

The  real  question  that  confronts  the  financier  is  the 
following:  Can  he  expect  this  increased  activity  will  be 
maintained  if,  in  addition  to  the  labor-tax,  he  levy  a 
money-tax  equal  to  the  entire  expense  of  supporting  the 
army?  To  answer  this  question  in  the  negative  is  not  to 
deny  whatever  is  true  in  the  claim  that  taxes  tend  to 
quicken  production.  A  tax  levied  for  that  purpose  must 
gradually  and  persistently,  and  through  a  long  series  of 
years,  raise  the  rate  which  it  imposes;  the  desired  result 
would  not  follow  should  industries  be  subjected  without 
warning  to  excessive  charges.  For  example,  is  it  reason- 
able to  believe  that  the  industry  of  the  Northern  States 
would  have  been  rendered  more  intense  if  the  total  ex- 
penditure of  1862  had  been  met  by  taxation?  The  ex- 
penditure of  that  year  was  equal  to  one  quarter  of  the 
total  national  product,  while  the  extraordinary  war  ex- 
penditure was  equal  to  one  fifth  of  such  product.  Assum- 
ing that  newly  levied  taxes  might  have  secured  the  money 
for  1862,  can  one  suppose  that  the  year  1865,  when  war 

54 


expenditure  amounted  to  twenty-seven  per  cent  of  gross 
product,  would  have  furnished  an  adequate  amount  of 
disposable  capital?  No  one  who  understands  the  psy- 
chology of  taxation  can  for  a  moment  admit  such  a  claim. 
A  tax  so  excessive  in  amount,  precipitated  without  warn- 
ing upon  established  industries,  would  have  encroached 
upon  working  profit,  weakened  the  incentive  to  labor, 
broken  the  mainspring  of  activity,  and  destroyed  the 
mechanism  of  production.  It  would,  therefore,  have  dis- 
regarded the  first  principle  of  treasury  management,  for  it 
would  have  dried  up  the  source  from  which  all  revenue 
must  come.  An  adequate  policy  for  the  conduct  of  a  war 
must  be  able  to  carry  a  people  through  to  the  end,  and  not 
expose  them  to  the  danger  of  a  stranded  treasury  in  the 
midst  of  conflict. 

If,  on  the  other  hand,  a  part  of  the  extraordinary  ex- 
penditure should  be  met  by  an  appeal  to  credit,  the  loans 
would  be  largely  absorbed  by  free  capital.  This  would 
cause  no  derangement  of  existing  industries,  and  the  sav- 
ing in  this  manner  secured  would  be  voluntary  saving. 
The  idea  of  loss  would  not  attend  the  payment  of  capital 
to  the  state,  but  rather  the  thought  of  establishing  a  per- 
manent income  would  induce  to  renewed  activity.  The 
administration,  therefore,  would  run  no  risk  of  exhausting 
the  fund  from  which  future  revenue  might  be  secured,  for 
it  would  be  continuously  replenished  by  willing  hands. 
It  is  altogether  by  the  mark  to  say  that  loans  must  in  the 
end  be  paid  from  the  proceeds  of  taxes,  and  that,  in  conse- 
quence, the  advantage  of  an  appeal  to  credit  is  apparent 
rather  than  real.  The  question  is,  whether  the  desire  to 
avoid  taxes  in  the  future  will  induce  men  to  suffer  the  bur- 
den of  present  payments.  If  they  truthfully  declare  such 
willingness,  there  can  be  no  necessity  of  resorting  to  credit. 
But  if,  as  an  analysis  of  character  declares,  the  potency  of 
motives  is  inversely  as  the  remoteness  of  'interests  con- 
cerned, this  abstract  truth,  that  taxes  must  finally  equal 
the  sums  borrowed,  can  not  be  relied  upon  to  induce  men 
to  practice  self-restraint  in  consumption,  or  to  undergo 
severe  toil  in  production.     It  is  such  considerations  as 


00 


these  that  lead  us  to  regard  the  taxing  policy  as  inadequate 
to  the  demand  of  an  exhaustive  war. 

Shall  the  extraordinary  expenditure  imposed 
by  a  war  be  covered  entirely  by  the  proceeds  of 
loans  ? 

The  policy  which  is  here  brought  to  view  has  been  a 
favorite  one  with  many  financiers.  The  general  claim  in 
its  favor  is  that,  while  a  people  are  engaged  in  war,  their 
industries  should  be  freed  from  all  unnecessary  incum- 
brances, in  order  that  they  may  supply  the  "extra  prod- 
uct" which  the  "extra  consumption  of  the  government" 
demands.  The  conclusion  of  such  reasoning  is  that,  while 
a  war  lasts,  no  new  taxes  should  be  imposed. 

It  has  been  already  observed,  in  the  foregoing  dis- 
cussion, that  the  conception  here  presented  is  erroneous. 
The  consumption  of  a  people  engaged  in  war  is  not  greatly 
in  excess  of  peace  consumption.  It  may,  if  necessary,  be 
brought  down  to  less  than  peace  consumption.  An  ade- 
quate financial  policy  demands  only  that  average  produc- 
tion should  be  maintained.  It  is  true  that  average  pro- 
duction calls  for  more  intense  application  on  the  part  of 
non-belligerents,  but,  if  business  men  are  not  discouraged 
by  an  erroneous  financial  policy,  the  industrial  habits  of 
the  people  may  be  relied  upon  to  attain  this  end.  Indeed, 
the  administration  may  reasonably  hope  that  a  certain 
amount  of  taxes  will  be  willingly  paid,  in  addition  to  what 
was  termed  above  the  labor-tax.  The  motive  or  force 
which  the  financier  must  call  into  play  to  secure  so  desir- 
able an  end  is  patriotism.  If  the  purpose  of  the  govern- 
ment be  fully  appreciated  and  approved,  a  free  people 
will  gladly  undergo  extensive  sacrifices  in  order  to  carry 
out  an  adopted  policy.  It  is  a  recognized  fact  that  self- 
governing  peoples  are  stronger  for  tax  purposes  than  the 
subjects  of  a  monarchical  state,  for  their  will  lies  more 
closely  to  the  heart  of  the  state.  But  the  administration 
of  a  self-governing  people  should  never  undertake  a  war  in 
favor  of  which  there  is  no  strong  sentiment.  As  things 
go,  then,  in  democratic  countries,  it  does  not  appear  that 
loans  to  the  full  extent  of  extraordinary  demands  are 

56 


necessary,  and  there  is  no  question  as  to  the  superiority  of 
taxes  over  loans  when  their  use  will  not  curtail  industrial 
energy.  The  measure  of  this  first  money-tax  should  be 
the  popular  enthusiasm  for  the  war. 

What,  however,  is  the  specific  argument  against 
the  policy  of  securing  the  entire  war  revenue  from 
loans?  Many  considerations  might  be  presented  showing 
the  dangers  that  beset  this  method  of  financiering,  but  a 
study  of  certain  attempted  realizations  of  it  may,  perhaps, 
disclose  its  inadequacy  the  most  clearly.  There  are  very  few 
cases  in  which  a  struggle  of  any  magnitude,  testing  at  all  a 
people's  financial  resources,  has  been  carried  to  a  success- 
ful issue  on  the  basis  of  a  loan  policy;  while  there  are  many 
instances  of  an  abandonment  of  this  policy  during  the 
progress  of  a  war,  which  itself  must  be  accepted  as  confes- 
sion of  a  failure.  Twice  in  the  history  of  our  country  has 
this  fatal  overconfidence  in  the  sufficiency  of  public  credit 
brought  a  rich  and  energetic  people  to  feel  the  stress  of 
money  demands,  and  to  experience  the  evils  of  ruinous 
and  expensive  methods  of  treasury  control.  It  is  not  true 
that  the  actual  failure  of  any  policy  proves  the  impossi- 
bility of  its  success;  but  it  is  true  that  a  careful  study  of 
several  failures  will  permit  one  to  decide  whether  contin- 
ued ill-success  is  due  to  inadequate  management  or  to 
erroneous  principles  in  the  policy  itself.  Understanding, 
then,  the  limitations  rightfully  placed  upon  all  arguments 
from  history,  let  us  turn  our  attention  to  the  financial 
conduct  of  the  two  great  wars  in  which  the  United  States 
has  been  engaged — that  of  1812  and  that  of  1861. 

The  financial  policy  which  was  adopted  for  the  con- 
duct of  the  war  of  1812  finds  its  first  statement  in  the 
treasury  report  of  1807.  This  has  been  called  the  war- 
report  of  Albert  Gallatin.  The  reason  why  so  astute  a 
politician  forced  this  question  thus  early  upon  the  atten- 
tion of  Congress  may  not,  perhaps,  with  clearness  be  de- 
termined ;  it  is  sufficient  for  our  present  purpose  to  notice 
the  fact.  The  financial  condition  of  the  treasury  at  this 
time  was  as  follows:  The  permanent  revenue  of  the  coun- 
try was  estimated  at  $14,500,000,  while  the  permanent  ex- 
penditure for  peace  purposes  was  estimated  at  $11,600,000. 

57 


In  this  expenditure,  however,  there  was  included  an  annual 
payment  on  account  of  the  debt-service  of  $8,000,000, 
which  would  be  reduced  to  $3,400,000  after  1808,  because 
of  the  inability  of  the  government  to  proceed  as  rapidly  as 
heretofore  in  the  expungement  of  the  debt.  Taking  this 
into  the  account,  the  permanent  expenditures  on  a  peace 
basis  could  not  exceed  $7,000,000,  and  this  would  provide 
a  permanent  annual  surplus  of  $7,500,000. 

It  was  in  the  presence  of  such  financial  prospects  that 
the  Secretary  spoke  his  views  on  the  proper  method  of 
treasury  administration  in  the  event  of  a  commercial  war. 
His  plan  may  be  the  best  presented  in  his  own  words, 
which  are  as  follows: 

That  the  revenue  of  the  United  States  will,  in  subsequent 
years,  be  considerably  impaired  by  a  war,  neither  can  or  ought  to  be 
concealed.  It  is,  on  the  contrary,  necessary,  in  order  to  prepare  for 
the  crisis,  to  take  an  early  view  of  the  subject,  and  to  examine  the 
resources  which  should  be  selected  for  supplying  the  deficiency  and 
defraying  the  extraordinary  expenses. 

There  are  no  data  from  which  the  extent  of  the  defalcation  can 
at  this  moment  be  calculated,  or  even  estimated.  It  will  be  suf- 
ficient to  state — 1.  That  it  appears  necessary  to  provide  a  revenue 
at  least  equal  to  the  annual  expenses  on  a  peace  establishment,  the 
interest  of  the  existing  debt,  and  the  interest  on  the  loans  which  may 
be  raised.  2.  That  those  expenses,  together  with  the  interest  of 
the  debt,  will,  after  the  year  1808,  amount  to  a  sum  less  than 
$7,000,000;  and,  therefore,  if  the  present  revenue  of  $14,500,000 
shall  not  be  diminished  more  than  one  half  by  a  war,  it  will  still  be 
adequate  to  that  object,  leaving  only  the  interest  of  war-loans  to  be 
provided  for. 

Whether  taxes  should  be  raised  to  a  greater  amount,  or  loans 
be  altogether  relied  on  for  defraying  the  expenses  of  the  war,  is  the 
next  subject  of  consideration. 

Taxes  are  paid  by  the  great  mass  of  the  citizens,  and  immedi- 
ately affect  almost  every  individual  in  the  community.  Loans  are 
supplied  by  capitals  previously  supplied  by  a  few  individuals.  In  a 
country  where  the  resources  of  the  individuals  are  not  generally 
and  materially  affected  by  the  war,  it  is  practicable  and  wise  to 
raise  by  taxes  the  greater  part,  at  least,  of  the  annual  supplies. 
The  credit  of  a  nation  may  also,  from  various  circumstances,  be  at 
times  so  far  impaired  as  to  leave  no  resource  but  taxation.  In  both 
respects  the  situation  of  the  United  States  is  totally  dissimilar. 

There  is  no  question  but  that  the  Secretary  here  ex- 
presses full  confidence  in  the  adequacy  of  the  loan  policy  to 

58 


meet  the  financial  stress  of  a  war.  It  is  true  that  he  sug- 
gests the  levy  of  certain  new  taxes,  but  their  purpose  is 
"to  provide  for  the  interest  of  war-loans,  and  to  cover 
deficiencies  in  case  the  existing  revenue  should  fall  below 
seven  millions  of  dollars."  He  does  not  contemplate  taxa- 
tion as  a  means  of  defraying  war  expenditure. 

A  clearer  statement  of  this  policy  is  to  be  found  in  the 

report  of  1808: 

No  internal  taxes  [says  the  Secretary],  either  direct  or  indi- 
rect, are  therefore  contemplated,  even  in  the  case  of  hostilities 
carried  against  the  two  great  belligerent  powers. 

And  the  report  of  1809  comes  back  again  to  the  same 

thought: 

Loans  reimbursable  by  installments,  at  fixed  periods,  after  the 
return  of  peace,  must  constitute  the  principal  resources  for  defraying 
the  extraordinary  expenses  of  the  war. 

So  far,  then,  there  can  be  no  question  as  to  Mr.  Galla- 
tin's views  respecting  the  financial  conduct  of  a  war;  but 
the  impression  has  somehow  arisen  that  the  events  of  the 
years  1810  and  1811  caused  him  to  modify  the  opinions 
which  he  had  previously  expressed,  and  to  urge  upon  Con- 
gress the  adoption  of  taxes  to  a  degree  wholly  at  variance 
with  his  original  plan.^  There  is,  however,  no  evidence 
which  warrants  one  in  the  belief  that  the  Secretary  had 
abandoned  the  theory  of  loan  financiering;  but,  on  the 
other  hand,  in  a  letter  of  January  10,  1812,  addressed  to 
the  chairman  of  the  Committee  of  Ways  and  Means,  there 
may  be  found  a  restatement  of  the  loan  policy,  perfect  in 
every  essential  particular.  It  is  true  that  the  committee 
was  recommended  to  urge  the  establishment  of  both  direct 
and  indirect  taxes,  but  this  was  due  to  the  fact  that  cus- 
toms revenue  had  fallen  below  the  estimates  of  peace  de- 
mands. These  taxes,  therefore,  could  not  with  propriety 
be  termed  "war- taxes,"  since  their  proceeds  were  to  be 
devoted  to  cover  peace  expenditure. 

It  may  be  proper  to  repeat  [wrote  Mr.  Gallatin]  that  so  long 
as  the  public  credit  is  preserved  and  a  sufficient  revenue  is  provided, 
no  doubts  are  entertained  of  the  possibility  of  procuring,  on  loan, 

1  Cf.  Adams's  "Life  of  Gallatin."  pp.  450-455. 

59 


the  sums  wanted  to  defray  the  extraordinary  expenses  of  a  war,  and 
that  the  apprehensions  expressed  relate  solely  to  the  terms  of  the 
loans,  to  the  rate  of  interest  at  which  they  can  be  obtained.^ 

Again,  in  another  place,  he  says:  "In  proportion  as  the 
ability  to  borrow  is  diminished,  the  necessity  of  resorting 
to  taxation  is  increased."  Such  a  sentence  as  this  could 
not  have  been  written  except  by  one  who  had  turned  his 
back  squarely  upon  the  policy  of  war  taxation.  It  regards 
taxes  as  a  last  resort,  to  be  employed  only  when  the  public 
credit  shall  have  been  exhausted;  the  tax  policy,  on  the 
other  hand,  holds  loans  in  reserve  to  be  used  only  in  pres- 
ence of  the  greatest  stress. 

But  did  the  views  of  Congress  coincide  with  those  of 
the  Secretary?  In  one  particular  only  do  we  find  them  at 
variance.  Mr.  Gallatin  desired  the  new  loans  to  rest  upon 
a  permanent  revenue  sufficient  to  pay  current  interest,  but 
the  members  of  Congress  had  no  such  view  of  this  necessity 
as  to  lead  them  to  press  to  legalization  the  necessary  bills. 
It  was  decided  by  the  Committee  of  Ways  and  Means  that 
a  war  of  four  years'  duration  could  be  carried  on  for 
$50,000,000,  and  in  February,  1812,  a  loan  of  $11,000,000 
was  authorized  as  the  sum  needed  for  the  first  year.  Upon 
the  same  day  that  the  House  passed  the  loan  bill,  Mr. 
Bacon,  chairman  of  the  Committee  of  Ways  and  Means, 
made  a  report  in  which  he  advocated  "war-taxes,"  setting 
forth  in  a  clear  manner  the  policy  of  the  administration. 
This  committee  was  as  yet  under  the  control  of  Mr.  Galla- 
tin. The  speech  which  attended  this  report  is  peculiar, 
showing  as  it  does  the  excessive  and  absurd  confidence 
which  the  extreme  war  party  had  in  war-loans.  After 
stating  that  a  loan  of  $11,000,000  was  regarded  as  suf- 
ficient for  the  first  year,  he  said: 

It  is  assumed  by  the  committee  that  extraordinary  or  war  ex- 
penditure of  the  two  succeeding  years  shall  also  rest  upon  further 
loans;  and  it  is  supposed  that  revenue  sufificient  to  pay  only  the 
ordinary  expenses  and  the  interest  on  the  old  debt  and  on  new  loans 
shall  be  immediately  provided  for  by  the  government.^ 

That  which  is  peculiar  in  Mr.  Bacon's  speech  is  his 

1  "Writings  of  Gallatin,"  vol.  i,  p.  514. 

2  "Annals  of  Congress,"  for  Twelfth  Congress,  1st  Session,  col.  1095. 

60 


warning  to  Congress  against  relying  upon  the  proceeds  of 
loans  to  pay  the  interest  upon  debts  contracted. 

If  we  suffer  ourselves  [he  said]  to  yield  to  the  new  theory  of 
borrowing  both  principal  and  interest,  we  have  no  data  by  which  to 
judge  upon  what  probable  terms  loans  may  be  obtained  at  all,  or 
how  long  it  will  be  before  we  must  wind  up  business.^ 

Still  the  temper  of  the  House  called  for  just  such  argu- 
ments, for  there  was  a  strong  faction  that  held  taxes  for 
the  payment  of  current  interest  to  be  superfluous.  "How 
are  the  exigencies  of  the  government  for  the  next  year  to 
be  supplied?"  exclaimed  Mr.  Cheeves,  who  was  spokes- 
man for  this  faction.  "Is  the  deficiency  to  be  derived 
from  taxes?  No,  I  will  tell  gentlemen  who  are  opposed  to 
them,  for  their  comfort,  that  there  will  be  no  taxes  imposed 
for  the  next  year."  And  yet  in  the  expenditures  for  the 
next  year  it  was  necessary  to  include  the  interest  upon 
loans  already  voted.  There  can  be  no  question  but  that 
the  financial  policy  adopted  at  the  beginning  of  the  war  of 
1812  looked  to  credit,  rather  than  taxes,  as  the  source  of 
all  extraordinary  expenditure.^  Let  us  then  inquire  re- 
specting the  results  of  this  endeavor  to  realize  the  loan 
policy. 

It  is  not  my  purpose  to  trace  in  detail  the  course  of 
financial  management  for  the  war  of  1812.  All  that  is 
essential  to  the  end  held  in  view  may  be  succinctly  pre- 
sented by  a  few  comments  upon  the  two  tables  that  follow. 
In  these  tables  will  be  found  certain  facts  pertaining  to  the 
employment  of  public  credit,  whether  in  the  form  of  direct 
loans  or  of  an  issue  of  treasury  notes;  the  amounts  author- 

1  "Annals  of  Congress,"  for  Twelfth  Congress,  1st  Session,  col.  1098. 

2  It  is  indeed  amusing  to  notice  the  spleen  with  which  the  extreme  war 
pcirty  opposed  even  the  moderate  proposals  of  Mr.  Bacon  for  taxation.  "At 
the  last  session,"  exclaimed  Mr.  Wright,  of  Maryland,  "when  the  question  for 
rechartering  the  odious  British  bank  was  before  us,  we  had  to  encounter  the  in- 
fluence of  the  Secretary  of  the  Treasury.  .  .  .  Now,  at  this  session,  he  has  told 
us  that,  if  we  had  a  national  bank,  we  should  have  no  occasion  to  resort  to  in- 
ternal taxes;  thereby  calling  the  American  people  to  review  the  conduct  of  their 
representatives  in  not  continuing  that  bank,  and  thereby  to  fix  the  odium  of 
these  odious  taxes  on  the  National  Legislature.  Now  a  system  of  taxes  is  pre- 
sented truly  odious,  in  my  opinion,  to  the  people,  to  disgust  them  with  their  rep- 
resentatives and  to  chill  the  war  spirit.  .  .  .  Sir,  is  there  anything  of  originality 
in  his  (Mr.  Gallatin's)  system?  No!  it  is  treading  in  the  muddy  footsteps  of 
his  official  predecessors,  in  attempting  to  strap  around  the  necks  of  the  people 
this  odious  system  of  taxation,"  etc. 

61 


ized  by  the  several  acts,  the  amounts  issued,  and  the  condi- 
tions of  their  sale,  will  show  quite  clearly  the  degree  of  suc- 
cess that  attended  the  administration  of  the  loan  policy. 
It  is  necessary  to  observe  that  war  was  declared  upon  June 
18,  1812,  and  that  the  news  of  a  definite  treaty  of  peace 
arrived  in  New  York  upon  February  13,  1815,  The  period 
covered  by  the  tables,  therefore,  pertains  to  those  financial 
measures  considered  by  Congress  in  view  of  a  continuance 
of  the  war,  as  well  as  to  the  employment  of  public  credit 
for  war  purposes. 


Table  A. — Showing  loans  authorized,  and  the  facts  concern- 
ing their  sale,  for  the  war  of  1812. 


Date  of  loans 
auttxMized. 


March  14,  1812 

February  8,  1813.... 
August  2,  1813 

March  24,  1814 

irovember  15, 1814. . 
January  9,  1815 


Amounts 
ADthorized. 


$11,000,000 

16,000,000 

7,5.00,000 

26,000,000 

8,000,000 
6,000,000 


Amounts 
Issued. 


$10,284,'700.00 

18,109,377.43 

8,498,581.95 

(  9,919,476.25 

\   5,384,138.87 

(      746,403.31 

»  1,450,000.00 

200,000.00 


Eato  of 

Kate  of 

interest. 

sale. 

6^ 

par. 

(>% 

88 

6^ 

88i 

6^ 

80 

6^ 

80 

6^ 

80-95 

6^,  1% 

par. 

6^ 

par. 

Hate 

of  sale 

estimated 

on  gold 

basis. 


par. 

88 

68t 

80 

70 
65-69 
81-89 

89 


Table  B. — Showing  treasury  notes  authorized,  and  the  facts 
concerning  their  sale,  for  the  war  of  1812. 


Dote  of  acts  outlioHring 
Treaenry  notes. 

Amounts 
authorized. 

Amounts 
Issued. 

Eato  of 
interest 

Bate  of 

sale. 

Bate 

of  sale 

estimated 

on  gold 

basis. 

June  80,  1812 

February  25,  1813..-^.. 

March  4,  1814.. 

l)ecember  26,  1814.. 
February  24,  1815... 

$5,000,000 
,  6,000,000 
10,000,000 
10,500,000 
25,000,000 

$5,000,000 
5,000,000 

10,000,000 
8,318,400 

17,432,780 

6^,7^ 

par. 
par. 
par. 
par. 
100-104 

par. 

par. 
84-91 
86-90 
82-90 

One  of  the  most  significant  facts  which  a  comparison 
of  these  two  tables  presents,  is  the  relation  that  seems  to 

1  No  stock  was  actually  issued,  but  this  sum  was  borrowed  from  the  banks. 

62 


exist  between  loans  and  treasury  notes.  As  the  power  of 
Congress  to  secure  money  by  the  sale  of  bonds  decreased, 
reliance  upon  treasury  notes  increased.  The  inability  of 
the  government  to  place  bonds  was  recognized  in  the 
latter  part  of  1814:  in  December  of  that  year  and  Febru- 
ary the  year  following,  $35,500,000  of  treasury  notes  were 
authorized.  Turning  now  to  a  consideration  of  the  loans 
proper,  the  record  of  events  shows  that  the  first  loan  met 
with  no  enthusiasm.  Although  $11,000,000  had  been  au- 
thorized, and  the  Secretary  was  anxious  that  subscriptions 
should  be  rapid  and  sufficient  to  absorb  the  entire  sum,  he 
found  at  the  end  of  two  months  that  only  $6,000,000  of  the 
stock  had  been  subscribed.  Mr.  Gallatin  admitted  that 
the  success  of  the  loan  was  "more  than  doubtful,"  and  it 
was  because  of  the  tardy  sale  of  bonds  that  Congress  au- 
thorized the  first  issue  of  treasury  notes.  It  is  true  that 
the  terms  of  this  first  loan  were  not  attractive,  and  that  the 
greatest  enthusiasm  for  the  war  was  found  outside  the 
moneyed  classes;  but  one  must  not  lose  sight  of  the  fact 
that  the  only  new  taxes  levied  for  the  support  of  this  loan 
consisted  in  a  slight  alteration  of  tonnage  rates  and  a  tardy 
increase  of  customs  duties.  The  financial  policy  upon 
which  this  war  was  to  be  carried  through  appears  to  have 
shown  signs  of  weakness  before  the  struggle  had  been 
fairly  begun. 

On  February  8th,  the  following  year,  the. government 
again  came  upon  the  market  for  money,  this  time  demand- 
ing $16,000,000.  The  weakness  of  the  previous  loan  was 
charged  to  the  fact  that  too  strict  conditions  had  been  im- 
posed upon  the  administration  in  its  negotiations;  in  this 
loan,  therefore,  as  in  all  subsequent  loans,  the  only  condi- 
tion insisted  on  by  Congress  was  the  right  of  reimburse- 
ment after  a  specified  term  of  years.  The  passage  of  this 
act  elicited  much  discussion,  concerning  both  the  propriety 
of  the  war  and  the  adequacy  of  the  financial  policy.  Some 
few  members  saw  that  loans  resting  on  good  intentions 
only  must  lead  to  disaster. 

In  finance  Isaid  one  member]  the  wisdom  of  man  has  never 
been  able  to  discover  any  effectual  security  to  public  credit  short 

63 


of  certain  funds  or  revenue  pledged  for  the  redemption,  and  suf- 
ficiently productive  to  pay  at  least  the  interest,  of  the  debt.* 

Oddly  enough,  Steuart  on  "Political  CEconomy"  was 
quoted  in  support  of  this  common-sense  remark.  But 
common  sense  does  not  seem  to  have  been  regarded  at  this 
time  as  essential  to  the  guidance  of  the  nation's  finances, 
and  no  steps  were  taken  toward  an  increase  of  taxation. 
This  loan  was  placed  at  eighty-eight  cents  on  the  dollar, 
while  pressing  demands  were  met  by  an  additional  issue  of 
$5,000,000  in  treasury  notes. 

Still  there  are  many  expressions  which  show  that  Con- 
gress was  beginning  to  suspect  the  inadequacy  of  the  loan 
policy,  and  at  an  extra  session,  called  in  May,  1813,  steps 
were  taken  toward  laying  the  foundation  of  a  system  of 
internal  revenue.  But  it  would  be  an  error  to  suppose 
that  the  original  loan  policy  was  at  this  time  abandoned. 
Congress  had  now  reached  the  position  defined  in  Galla- 
tin's financial  reports,  and  recognized  the  necessity  of 
providing  some  basis  for  the  credit  of  the  state.  There  is 
but  the  slightest  suggestion  in  the  report  of  Mr.  Jones, 
who  was  then  acting  as  Secretary  of  the  Treasury,  which 
looked  to  the  employment  of  taxes  for  making  headway 
against  war  demands.  According  to  his  view,  the  chief 
benefit  of  new  taxes  would  accrue  in  enabling  the  govern- 
ment to  carry  out  its  loan  policy. 

As  reliance  [he  says]  must  be  had  upon  a  loan,  for  the  war 
expenses  of  the  year  1814,  the  laying  of  the  internal  taxes  may  be 
considered,  with  a  view  to  that  object,  as  essentially  necessary:  in 
the  first  place,  to  facilitate  the  obtaining  of  the  loan;  and  secondly, 
for  procuring  it  on  favorable  terms. 

From  the  message  of  the  President,  also,  may  one 
learn  that  the  difficulty  of  negotiating  bonds  at  par  was 
regarded  as  the  only  justification  of  new  taxes.  The  rev- 
enue system,  as  adopted,  included  a  direct  tax  upon  the 
several  States,  and  internal  duties  of  various  sorts.  They 
were  called  "war- taxes,"  and,  by  the  act  that  authorized 
them,  were  limited  to  one  year  from  the  conclusion  of  a 
treaty  of  peace.     The  adoption  of  this  system,  however, 

1  "Annals  of  Congress,"  for  Twelfth  Congress,  2d  session,  col.  896. 

64 


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appears  to  have  had  little  influence  upon  public  credit, 
partly  because  the  new  source  of  revenue  could  not  be  re- 
lied upon  for  at  least  a  year,  but  more  especially  because 
the  new  taxes  were  temporary,  and  not  co-existent  with 
the  debts  assigned  to  them. 

This  plan  of  carrying  on  the  war  by  the  proceeds  of 
loans  may  be  said  to  have  broken  down  in  connection  with 
the  $25,000,000  loan  of  1814.  To  measure  adequately  the 
magnitude  of  this  operation,  it  must  be  taken  in  connec- 
tion with  the  $10,000,000  of  treasury  notes  authorized 
about  the  same  time,  from  which  it  appears  that  $35,000,000 
of  debt  were  created  by  Congress  to  cover  the  appropria- 
tions of  a  single  sitting.  This  was  a  sum  equal  to  five 
times  the  average  peace  expenditure,  and  to  the  total  ante 
bellum  revenue  for  two  and  a  half  years;  and  it  was  thought 
that  this  sum  might  safely  rest  upon  the  modest  appeal  to 
tax  contributions  just  mentioned. 

There  is  one  element  of  complication  that  must  not  be 
overlooked,  if  the  danger  and  uncertainty  which  attended 
the  financial  operations  of  this  period  are  to  be  clearly  per- 
ceived. Mr.  Gallatin  had  relied  largely  for  the  success  of 
his  plan,  as  presented  in  1807,  upon  the  assistance  of  the 
United  States  Bank.  He  thought  to  control  the  circulat- 
ing medium  of  the  country  by  means  of  this  institution, 
and  to  procure  from  it  much  assistance  in  the  placement  of 
public  bonds.  Nor  can  it  be  doubted  that  Congress,  in 
refusing  to  grant  a  renewal  of  the  charter  of  the  bank,  is 
largely  responsible  for  the  financial  straits  into  which  the 
government  fell.  The  increase  in  the  circulation  of  the 
private  banks  brought  with  it  the  evils  of  inflation,  even 
before  the  suspension  of  specie  payments,  which  occurred 
in  August  and  September,  1814.  Some  conception  of  the 
difficulty  of  carrying  through  any  financial  operation  may 
be  gained  when  one  learns  that  the  government  was 
obliged  to  select  ninety-four  State  banks  as  the  depositor- 
ies of  its  funds;  and,  so  various  were  the  kinds  of  paper 
money  in  use,  that  it  was  found  necessary  to  keep  four 
separate  ledger  accounts  in  each.  This  can  not,  however, 
be  urged  as  an  adequate  excuse  for  the  failure  of  that  finan- 
cial policy  adopted  for  the  prosecution  of  the  war.     All 

65 


that  may  be  truthfully  said  is,  that  the  failure  of  this  policy 
was  demonstrated  more  quickly  than  would  have  been  the 
case  could  specie  payments  and  clear  accounts  have  been 
maintained. 

From  the  table  given  on  page  62,  it  appears  that  the 
proceeds  of  the  loan  of  March  24,  1814,  are  presented  in 
three  separate  sets  of  figures.  This  method  is  adopted  in 
order  that  the  tendencies  making  their  appearance  at  this 
time  in  connection  with  treasury  management  may  be  more 
perfectly  disclosed.  There  was  authorized  by  this  act  a 
placement  of  $25,000,000  of  bonds.  The  first  call  was  for 
$10,000,000,  which  resulted  in  the  receipt  of  $7,935,581  in 
cash,  and  in  the  issue  of  $9,919,476  in  six-per-cent  stock. 
This,  it  will  be  observed,  was  a  sale  of  bonds  at  twenty  per 
cent  discount,  being  a  lower  price  by  eight  cents  in  the 
dollar  than  any  which  the  government  had  previously 
accepted.  Four  months  later,  a  second  advertisement 
appeared  calling  for  $6,000,000  additional  of  the  $25,000,000 
authorized.  The  amount  of  debt  created  by  this  opera- 
tion was  $5,384,134,  but  the  equivalent  of  cash  received 
into  the  treasury  was  only  $4,307,307.  At  the  time,  how- 
ever, that  the  major  part  of  this  loan  was  negotiated,  a 
depreciated  paper  was  accepted  as  the  medium  of  pay- 
ment; and,  if  one  permit  this  discount  to  modify  his  cal- 
culations, he  will  discover  that  the  specie  price  of  these 
bonds  was  a  trifle  above  seventy  cents  on  the  dollar.  Nor 
do  these  figures  adequately  present  the  decadence  of  public 
credit,  for  the  government  found  it  necessary  to  resort  to 
unusual  devices  in  order  to  place  the  bonds  at  all.  To 
the  extent  of  $1,900,000  this  debt  found  subscribers  in  the 
cities  of  New  York,  Philadelphia,  and  Baltimore,  on  con- 
dition that  the  amounts  subscribed  should  be  expended 
in  the  defense  of  the  cities  furnishing  the  money.  Such 
dickering  and  trading  show  the  exhausted  condition  of 
public  credit  even  more  clearly  than  the  discount  suffered. 

The  third  attempt  to  raise  money  on  authority  of 
the  act  of  March  24th  marks  the  collapse  of  the  loan 
policy.  Of  the  total  amount  of  debt  authorized,  there 
remained  $12,757,112  to  be  placed,  and  we  may  be  sure 
that  the  government  would  have  gladly  received  the  en- 

66 


tire  sum.  The  amount  of  stock  created  was  $746,403,  the 
equivalent  of  cash  received  being  $652,534.  The  nominal 
price  varied  from  eighty  to  ninety-five,  the  specie  price 
ranging  from  sixty-five  to  sixty-nine.  Of  the  moneys  thus 
received,  less  than  $234,000  were  available  for  war  pur- 
poses, the  remainder  being  paid  after  the  declaration  of 
peace;  and  of  this  modest  sum  $150,000  was  signed  by 
certain  corporations  of  Baltimore  to  build  a  frigate  for  the 
defense  of  their  own  harbor.  During  the  last  quarter  of 
the  year  1814,  receipts  from  all  sources  fell  far  short  of 
expenditures,  so  that  an  actual  deficit  of  $3,800,000  made 
its  appearance  in  public  accounts. 

Do  not  such  facts  justify  the  conclusion  that 
the  control  of  the  public  treasury  during  the  war  of 
1812  proved  a  failure?  At  the  beginning  of  the 
struggle,  Mr.  Bacon  said  he  did  not  know  how  long 
it  would  be  before  the  treasury  must  "wind  up  busi- 
ness;" the  course  of  events  showed  that  it  was 
possible  to  run  on  baseless  promises  a  little  over  two 
years.  But  it  may  be  asked :  Was  this  failure  due  to 
the  erroneous  principles  upon  which  the  financial 
policy  was  based,  or  to  bad  administration? 
The  testimony  of  contemporary  statesmen  upon  this 
point  is  of  much  importance.  In  the  latter  part  of  1814, 
the  necessity  for  new  and  vigorous  revenue  legislation 
came  to  be  quite  generally  recognized.  The  President 
stated  this  as  one  of  the  two  reasons  for  calling  an  extra 
session  of  Congress  in  September.  But  the  most  direct 
and  complete  testimony  upon  this  point  is  found  in  the 
financial  documents  of  Mr.  Dallas,  who  was  called  to  ad- 
minister the  Department  of  the  Treasury.  "The  plan  of 
finance,"  says  the  new  Secretary,  referring  to  the  months 
in  question,  "which  was  predicated  upon  the  theory  of  de- 
fraying the  extraordinary  expenses  of  the  war  by  succes- 
sive loans,  had  already  become  inoperative."  Nor  did 
the  new  Secretary  shrink  from  placing  the  responsibility 
of  failure  where  it  belonged.  The  falling  off  of  revenue 
and  the  collapse  of  credit  were  not  ascribed  by  him  to 
either  "the  want  of  resources  or  the  want  of  integrity  in 
the  nation,"  but  "to  the  inadequacy  of  our  system  of  tax- 

67 


ation  to  form  a  foundation  of  public  credit,  and  the  ab- 
sence from  our  system  of  the  means  which  are  the  best 
adapted  to  anticipate,  collect,  and  distribute  the  public 
revenue."  He  proposed  the  adoption  of  a  new  plan  of 
finance,  the  characterizing  feature  of  which  should  be 
"prompt  and  resolute  application  to  the  resources  of  the 
country."  In  addition  to  the  re-establishment  of  a  na- 
tional bank,  his  policy  embraced  three  distinct  revenue 
measures.  He  demanded,  first,  war-taxes,  nor  did  he 
mean  by  this  expression  what  Mr.  Bacon  meant  in  1812; 
second,  tax-loans,  or  temporary  loans,  by  means  of  which 
the  new  taxes  could  become  immediately  available;  third, 
an  extensive  use  of  treasury  notes,  approaching  a  little 
more  nearly  our  modern  idea  of  legal  tenders.* 

Any  criticism  upon  this  plan  should  be  made  in  view 
of  the  fact  that  two  years  of  inadequate  financial  admin- 
istration had  bequeathed  a  legacy  of  confusion  and  of 
disordered  credit.  The  problem  presented  to  Mr.  Dallas 
did  not  consist  in  forming  a  war  policy  which  should  har- 
monize in  all  particulars  with  the  requirements  of  sound 
finance,  but  in  rescuing  the  finances  of  the  state  from  disas- 
ter already  experienced.  So  far  as  his  plan  refers  to  taxes, 
it  is  commendable.  Twenty-one  millions  were  to  be 
drawn  from  this  source.  The  tax-loans,  also,  were  de- 
manded by  the  necessities  of  the  case.  It  is  likewise  com- 
mendable that  he  did  not  at  this  time  make  the  treasury 
notes  a  legal  tender  for  the  payment  of  debts.  Yet  this 
would  have  been  the  necessary  and  logical  result  of  the 
financial  policy  framed  by  Gallatin.  They  who  defend 
the  loan  policy  always  assume  that  public  credit  can  be 
maintained  by  an  increase  of  the  tax-levy  equal  to  the 
current  demands  of  the  public  stock  created,  but  this  is 
found  to  be  a  mistake.  It  is  because  this  is  impossible, 
and  because  men  will  not  freely  lend,  that  the  government 
feels  justified  in  forcing  a  loan  out  of  the  people  by  means 

1  This  financial  plan,  submitted  by  Secretary  Dallas,  may  be  found  in  a  letter 
of  October  17,  1814,  addressed  to  the  Committee  of  Ways  and  Means.  The  note 
from  the  committee,  asking  for  suggestions,  is  also  significant.  Its  first  sentence 
is  as  follows:  "The  Committee  of  Ways  and  Means  have  had  under  their  con- 
sideration the  support  of  public  credit  by  a  system  of  taxation  more  extended 
than  the  one  hitherto  adopted."     Cf.  "Life  and  Writings  of  Dallas,"  pp.  234-243. 

68 


of  legal-tender  notes.  The  first  issue  of  treasury  notes,  it 
will  be  remembered,  was  regarded  as  necessary  because  of 
the  tardy  sale  of  bonds,  and  it  is  but  another  step  in  the 
path  already  entered  upon  to  give  notes  a  forced  circula- 
tion. Legal-tender  notes  lie  as  a  germ  in  the  loan  policy, 
and  it  is  probable  that  the  termination  of  the  war  saved 
the  country  from  the  calamity  which  their  issue  would 
have  occasioned. 

Some  of  my  readers  may  be  inclined  to  excuse  Mr. 
Gallatin  from  all  responsibility,  and  to  deny  that  the 
failure  of  treasury  administration  during  the  war  of  1812 
argues  aught  against  the  sufficiency  of  the  loan  policy  pro- 
posed by  him,  because  Congress  refused  to  grant  the  new 
taxes  asked  for  at  the  beginning  of  the  war.  It  is  true 
that  a  proper  administration  of  the  loan  policy  demands 
clear  revenue  equal  to  the  debt  service  and  the  peace  ex- 
penditure. It  is  also  true  that  the  special  tax-bills  recom- 
mended to  the  Twelfth  Congress  failed  to  secure  legal 
sanction;  but  it  would  be  incorrect  to  conclude,  because 
these  particular  taxes  were  withheld,  that  the  essential 
requirements  of  the  loan  policy  were  not  complied  with. 
A  glance  at  the  general  balance-sheet  covering  the  three 
years  of  the  war  will  show  that  permanent  revenue  not 
only  covered  permanent  expenditure,  but  furnished  a  sur- 
plus of  nearly  $6,000,000  for  war  purposes.  Although  the 
new  taxes  were  refused,  the  receipts  from  old  taxes  ex- 
ceeded expectation;  it  is  impossible,  therefore,  for  the  ad- 
vocates of  the  loan  theory  to  shift  the  responsibility  of  the 
failure  of  Mr.  Gallatin's  policy  upon  the  shoulders  of  Con- 
gress. This  balance-sheet  is  presented  in  the  following  table : 

Table  showing  the  source  of  moneys  expended  for  war 

purposes. 


TEAE  ENTDINQ 

War  expenditure  paid  out 
of  proceeds  of  taxes. 

War  expenditure  paid  out 
of  proceeds  of  loana. 

December  31,  1812 

December  81,  1813 

December  31,  1814 

$3,560,150.00 

1,399,277.71 

775,828.53 

$12,477,988.39 
24,849,810.41 
27,047,309.37  > 

Total 

$5,735,256.24 

$64,375,108.17 

I  There  is  included  in  this  sum  an  actual  deficit  in  accounts. 

'  69 


It  thus  appears  that,  for  a  total  war  expenditure  of 
some  $70,000,000,  it  was  found  necessary  to  create  a  debt 
of  only  $64,300,000,  a  fact  which  shows  how  futile  is  an 
apology  like  that  suggested  above  in  favor  of  the  loan 
policy.  So  far  as  clear  revenue  is  concerned,  the  demands 
of  the  theory  were  met,  and  it  is  the  theory  rather  than 
the  remissness  of  Congress  that  must  be  held  responsible. 

Or,  again,  it  may  be  that  some  one,  quoting  that  old 
maxim,  salus  populi  suprema  lex,  a  maxim  regarded  by 
dullards  as  the  first  principle  in  finance,  will  ask:  Wherein 
did  this  policy  fail?  Did  not  the  Government  get  the 
money  and  carry  through  the  war?  Such  a  question  can 
only  be  answered  by  placing  the  actual  results  of  treasury 
management  during  the  war  of  1812  in  comparison  with 
the  demands  of  adequate  management. 

An  adequate  financial  policy  will  place  the  credit  of 
a  state  on  so  firm  a  basis,  and  guard  it  so  jealously,  that 
the  government  will  never  be  called  upon  to  suffer  ruinous 
discount  in  the  placement  of  its  bonds.  The  record  of 
this  war  shows  that  even  at  the  beginning  there  was  no 
enthusiasm  for  the  public  stocks,  that  every  month  as  it 
passed  saw  the  nation's  credit  decline,  and  that  the  last 
quarter  of  the  year  1814  showed  a  deficit  in  public  accounts 
while  the  government  still  possessed  the  right  to  borrow 
$12,000,000. 

An  adequate  financial  policy  will  provide  such 
extensive  resources  that  a  war  once  entered  upon 
may  be  carried  through  to  the  end  without  change 
of  plan.  It  must  be  elastic  and  pliable,  so  as  to  be 
ready  for  all  probable  emergencies.  In  the  present 
instance,  after  little  more  than  two  years  of  vain  en- 
deavor to  supply  the  demands  of  the  government, 
the  original  plan  was  abandoned,  and  a  new  theory 
was  admitted  by  the  administration  and  by  Con- 
gress. The  evils  necessarily  attendant  upon  this 
change  in  the  midst  of  a  war  were  only  obviated  by 
the  return  of  peace. 

An  adequate  financial  policy  will  not  be  forced 
to  use  treasury  notes,  except  as  a  convenient  method 

70 


of  managing  its  taxing  system.  We  have  already 
noticed  how  that  unwarranted  interference  with  the 
circulating  medium  follows  logically  from  a  deter- 
mination to  throw  the  entire  weight  of  war  expendi- 
ture upon  public  credit. 

It  must  be  admitted  that  Mr.  Dallas  passed  lightly 
over  this  stupendous  failure  in  financial  administration 
when,  in  reviewing  the  financial  operations  of  the  war,  he 
said: 

An  increase  of  the  expense,  and  a  diminution  of  the  supply, 
must  have  been  anticipated  as  the  inevitable  consequences  of  that 
event;  but  the  government  reposed  with  confidence  for  all  the 
requisite  support  upon  the  untried  resources  of  the  nation  in  credit, 
in  capital,  and  in  industry.  The  confidence  was  justly  reposed; 
yet  it  may,  perhaps,  be  considered  as  the  subject  for  regret,  and  it 
certainly  furnishes  a  lesson  of  practical  policy,  that  there  existed  no 
system  by  which  the  internal  resources  of  the  country  could  be 
brought  at  once  into  action,  when  the  resources  of  its  external  com- 
merce became  incompetent  to  answer  the  exigencies  of  the  time. 
The  existence  of  such  a  system  would  probably  have  invigorated  the 
early  movements  of  the  war,  might  have  preserved  the  public  credit 
unimpaired,  and  would  have  rendered  the  pecuniary  contributions 
of  the  people  more  equal  as  well  as  more  effective.  But,  owing  to 
the  want  of  such  a  system,  a  sudden,  and  an  almost  exclusive,  resort 
to  the  public  credit  was  necessarily  adopted  as  the  chief  instrument 
of  finance.  The  nature  of  the  instrument  employed  was  soon  devel- 
oped; and  it  was  found  that  public  credit  could  only  be  durably 
maintained  upon  the  broad  foundations  of  public  revenue.* 

It  is  not  my  purpose  to  follow  thus  in  detail  the  finan- 
cial history  of  the  war  of  1861.  So  far  as  principles  are 
concerned,  it  presents  nothing  with  which  the  foregoing 
study  has  not  already  made  us  familiar.  Here  is  found 
the  same  policy  for  the  management  of  the  public  treasury; 
this  policy  follows  the  same  course  in  its  development,  and 
works  the  same  general  results.  The  only  variation  in  the 
record  pertains  to  the  use  of  treasury  notes,  for,  in  the  case 
of  this  second  war,  the  loan  policy  was  not  arrested  until 
these  notes  were  given  the  legal  power  of  paying  private 
debts.  Upon  the  main  point  there  can  be  no  question. 
The  plan  recommended  by  Secretary  Chase,  and  adopted 
by  Congress,  was  to  rely  upon  public  credit  for  carrying 

1  "Report  on  the  Finances,"  December,  1815. 

71 


through  the  war.  In  a  special  report  of  July,  1861,  which 
deals  with  ways  and  means,  the  Secretary  expresses  himself 
as  follows: 

To  provide  the  large  sums  required  for  ordinary  expenditure, 
and  by  the  existing  emergency,  it  is  quite  apparent  that  duties  on 
imports,  the  chief  resource  for  ordinary  disbursements,  will  not  be 
adequate.  The  deficiencies  of  revenue,  whether  from  imports  or 
other  sources,  must  necessarily  be  supplied  from  loans;  and  the 
problem  to  be  solved  is  that  of  so  proportioning  the  former  to  the 
latter,  and  so  adjusting  the  details  of  both,  that  the  whole  amount 
needed  may  be  obtained  with  certainty,  with  due  economy,  with  the 
least  possible  inconvenience,  and  with  the  greatest  possible  inci- 
dental benefit  to  the  people. 

The  Secretary  has  given  to  this  important  subject  the  best 
consideration  which  the  urgency  of  varied  public  duties  has  allowed, 
and  now  submits  to  the  consideration  of  Congress,  with  great  defer- 
ence and  no  little  distrust  of  his  own  judgment,  the  conclusions  at 
which  he  has  arrived. 

He  is  of  the  opinion  that  not  less  than  eighty  millions  of  dollars 
should  be  provided  by  taxation,  and  that  two  hundred  and  forty 
millions  should  be  sought  through  loans. 

It  will  hardly  be  disputed  that,  in  every  sound  system  of 
finance,  adequate  provision  by  taxation  for  the  prompt  discharge 
of  all  ordinary  demands,  for  the  punctual  payment  of  the  interest  on 
loans,  and  for  the  creation  of  a  gradually  increasing  fund  for  the 
redemption  of  the  principal,  is  indispensable.  Public  credit  can  only 
be  supported  by  public  faith,  and  public  faith  can  only  be  main- 
tained by  an  economical,  energetic,  and  prudent  administration  of 
public  affairs,  and  by  the  prompt  and  punctual  fulfillment  of  every 
public  obligation.^ 

This  financial  policy  may  be  more  clearly  appre- 
hended if  we  notice  the  estimates  presented  by  the  Secre- 
tary. As  has  been  already  stated,  he  proposed  to  raise 
$80,000,000  by  taxes,  as  against  $240,000,000  by  loans. 
Of  this  amount  of  clear  revenue,  $65,800,000  were  required 
to  meet  the  ordinary  expenditures  of  the  peace  establish- 
ment. It  was  believed  that  existing  laws  would  provide 
about  $60,000,000,  from  which  it  followed  that  new  taxes 
to  the  amount  of  $20,000,000  were  required.  Of  this  sum, 
$9,000,000  were  to  be  devoted  to  payment  of  interest  upon 
the  new  debt,  and  $5,000,000  to  the  establishment  of  a 
sinking-fund  for  its  final  expungement.  Such  was  the 
financial  plan  upon  which  this  great  war  was  begun. 

1  "Report  on  the  Finances,"  July  4,  1861. 

72 


The  revenue  law  which  followed  this  report  modified 
customs  duties  so  as  to  intensify  the  principle  of  industrial 
protection,  established  a  three-per-cent  income-tax  upon 
all  incomes  over  $800,  and  apportioned  a  direct  tax  of 
$20,000,000  among  the  several  States.  The  income-tax 
was  not  to  take  effect  until  January,  1862,  and,  as  the  di- 
rect tax  was  apportioned  to  the  South  as  well  as  to  the 
North,  the  treasury  could  not  hope  for  the  entire  amount 
levied. 

In  the  December  report,  1861,  the  Secretary  declared 
renewed  confidence  in  the  financial  plan  which  he  had  pre- 
viously presented.  It  was  found,  however,  that  receipts 
from  customs  and  from  the  sale  of  public  lands  had  fallen 
off.  Thus,  for  the  quarter  ending  September  30th,  cus- 
toms duties  had  yielded  but  $7,198,602.  For  the  calendar 
year  ending  1861 ,  the  government  received  but  $30,795,795 
from  this  source,  as  opposed  to  $50,747,990  in  1860,  and 
$53,800,596  in  1859.  There  seemed,  therefore,  just 
ground  for  apprehension  lest  existing  taxes  should  fail  to 
support  the  peace  establishment,  and  the  loans  which  the 
government  chose  to  place.  This  fear  of  a  deficit,  from 
ordinary  sources  of  revenue,  impressed  itself  upon  the 
mind  of  the  Secretary,  and,  in  consequence,  he  proposed 
additional  duties  on  tea,  coffee,  and  sugar;  a  modification 
of  the  income-tax,  so  as  to  render  it  more  productive;  an 
increase  of  the  direct  tax  to  the  States;  and  a  tax  on 
whiskies,  tobacco,  bank-notes,  instruments  of  conveyance, 
and  the  like;  in  short,  he  proposed  the  establishment  of  the 
system  of  internal  duties.  Now,  all  this  has  the  appear- 
ance of  an  abandonment  of  the  loan-policy,  and  the  adop- 
tion of  the  policy  of  carrying  through  the  war  by  taxes,  but 
this  is  true  in  appearance  only.  The  total  sum  of  clear 
revenue  hoped  for  from  all  these  sources  of  income  was  but 
$90,000,000,  and  this,  as  the  Secretary  said,  was  not  more 
than  enough  to  meet  "even  economized  disbursements, 
and  pay  the  interest  on  the  public  debt,  and  provide  a 
sinking-fund  for  the  gradual  reduction  of  its  principal." 
"It  will  be  seen  at  a  glance,"  says  the  report  in  another 
place,  "that  the  amount  to  be  derived  from  taxes  forms 
but  a  small  portion  of  the  sums  required  for  the  expenses  of 

73 


the  war.  For  the  rest,  reHance  must  be  placed  on  loans." 
It  is  also  worthy  of  notice,  as  throwing  additional  light 
upon  the  policy  of  the  administration,  that  the  mind  of  the 
Secretary  seems  at  this  time  to  have  been  taken  up  with 
his  scheme  for  establishing  a  system  of  national  banking; 
for,  as  is  well  known,  one  purpose  of  this  scheme  was  to 
provide  a  ready  market  for  public  bonds.  It  comes,  there- 
fore, into  perfect  harmony  with  the  loan  policy  already 
adopted. 

It  was  in  the  latter  part  of  the  year  1863,  and  during 
the  first  part  of  1864,  that  the  inadequacy  of  the  loan 
policy  as  a  basis  of  war-financiering  forced  itself  upon  the 
minds  of  those  who  managed  public  affairs.  "To  check 
the  increase  of  debt,"  says  the  report  of  1863,  "must  be,  in 
our  circumstances,  a  prominent  object  of  patriotic  solici- 
tude." And  again:  "Hitherto  the  expenses  of  the  war 
have  been  defrayed  by  loans  to  an  extent  which  nothing  but 
the  expectation  of  its  speedy  termination  could  fully 
warrant."  The  report  then  restated  the  financial  policy 
as  adopted  in  1861,  and  continued: 

The  financial  administration  of  the  first  fiscal  year  after  the 
outbreak  of  the  rebellion  was  conducted  upon  these  ideas.  The 
acts  of  Congress  at  the  extra  session  of  July,  1861,  were  framed  with 
the  intention  of  supplying  the  full  amount  of  revenue  demanded  by 
them.  But  receipts  disappointed  expectation,  and  it  soon  became 
obvious  that  a  much  larger  proportion  of  the  means  needed  for  the 
fiscal  year  1862  than  the  principle  adopted  would  allow  must  be 
derived  from  loans. 

But  the  most  interesting  expression  in  this  document 
pertains  to  the  estimates  for  probable  future  demands: 

These  statements  [says  the  Secretary,  referring  to  the  es- 
timates} illustrate  the  great  importance  of  providing,  beyond  all 
contingency,  for  ordinary  expenditures  and  interest  on  debt,  and  for 
the  largest  possible  amount  of  extraordinary  expenditures,  by  taxa- 
tion. In  proportion  to  the  amount  raised  above  the  necessary  sums 
for  ordinary  demands  will  be  the  diminution  of  debt,  the  diminution 
of  interest,  and  the  improvement  of  credit.  It  is  hardly  too  much — 
perhaps  hardly  enough — to  say  that  every  dollar  raised  for  extra- 
ordinary expenditures  or  reduction  of  debt  is  worth  two  in  the  in- 
creased value  of  national  securities,  and  increased  facilities  for  the 
negotiation  of  indispensable  loans. 

74 


Could  this  truth  have  been  recognized  at  the 
beginning  of  the  war,  and  could  it  at  that  time  have 
influenced  the  treasury  policy,  the  financial  history 
of  the  last  twenty-five  years  would  have  been  materi- 
ally modified. 

Congress  also,  in  the  latter  part  of  1863,  began  to 
recognize  the  essential  weakness  of  the  loan  policy,  and  to 
turn  its  attention  to  the  necessity  of  taxes  for  distinctively 
war  purposes.  The  great  tax-bills  of  the  war  were  those 
of  June,  1864.  Mr.  Morrill,  in  whose  speech  of  a  year 
before  there  were  statements  showing  that  the  original 
policy  was  yet  intact,  admitted,  while  presenting  these 
new  bills,  that  money  must  now  be  secured  by  every  possi- 
ble means: 

The  treasury  [he  said]  requires  a  larger  supply  of  means,  and 
such  sources  of  revenue  as  have  not  already  yielded  their  maximum 
contributions  must  now  be  sought,  so  that  we  may  fill  the  measure 
of  our  wants.  .  .  .  This  [bill]  is  intended  as  a  war  measure,  a  tem- 
porary measure,  and  it  is  needful  that  it  pass  speedily.  Every  day's 
delay  in  the  passage  of  this  and  the  internal  revenue  bill  costs  the 
treasury  not  less  than  $500,000.^ 

This  language  is  very  different  from  the  financial 
dilettanteism  that  marked  the  attitude  of  our  financiers 
during  the  first  two  years  of  the  war. 

It  is  somewhat  difficult  to  exhibit  accurately  the  rapid 
fall  of  public  credit  from  1861  to  1866;  but  I  have  under- 
taken in  the  following  statement  to  approximate  such  an 
exhibit  by  showing  the  specie  price  of  all  the  obligations 
issued  during  the  war.  The  computation  has  been  made 
by  estimating  the  value  of  the  total  receipts  from  credit 
for  each  quarter  at  the  average  price  of  gold  during  that 
quarter.  The  only  source  of  error  in  this  method  arises 
from  the  fact  that  the  average  price  of  gold  for  any  three 
months  may  not  be  the  actual  price  at  which  the  proceeds 
of  bonds  were  covered  into  the  treasury,  but  any  closer 
computation  requires  more  complete  data  than  the  au- 
thorities at  Washington  have  yet  given.  It  is,  however, 
believed  that  the  conclusions  may  be  relied  upon  as  sub- 
stantially correct. 

*  Young's  "Customs- Tariff  Legislation,"  p.  cxxxiii. 

75 


Table  showing  treasury  receipts,  from  public  obligations  of 
all  sorts,  for  each  quarter  during  the  war,  and  the  gold 
value  of  such  receipts,  estimated  on  the  average  price  of 
gold  for  each  quarter. 


■ 

8UMMAEY. 

Gross  teeelptB  from 
debt  creat'Sd. 

Gold  value  of  gross 
receipts. 

Percent- 
age 
realized. 

For  the  quarters  ending- 
March  31,     -1862 

June  30,            "    

September  30,   "    

December  81,    "    

March  31,       1863 

June  30,            "    

September  30,   "    

December  31,    "    

March  31,        1864 

June  30,            "    

September  30,   "    

December  31,    "    

March  31,        1865 

June  30,            "    

September  30,   "    

$60,947,202.67 
209,049,203.81 
68,934,420.36 
131,631,479.40 
178,669,759.25 
216,460,067.49 
118,267,491.75 
150,450,843.85 
191,922,104.42 
235,371,791.92 
147,735,822.42 
179,908,674.29 
175,313,376.72 
861,905,625.74 
138,765,727.22 

$69,627,182.84 

200,230,763.59 

69,648,958.94 

101,250,933.95 

116,195,351.69 

145,829,147.47 

89,800,506.48 

100,862,245.72 

120,220,006.20 

122,681,629.23 

61,295,592.72 

80,366,204.80 

88,094,971.80 

253,406,319.14 

97,038,873.04 

97-67 
95-78 
86-54 
76-92 
64-51 
67-37 
75-93 
67-40 
62-64 
52-08 
41-49 
44-67 
60-25 
70-02 
69-93 

For  the  years  ending- 
December    81,1862 

81,1863 

"          81,1864 

September  80,1865 

$470,562,306.24 
663,748,162.34 
.754,938,393.05 
676,984,729.68 

$420,657,784.32 
451,687,261.36 
884,462,432.95 
438,540,163.98 

89-39 
68-05 
50-93 
64-87 

For  the  forty-five  months  of 
the  war 

$2,565,233,691.31 

.  $1,695,347,632.61 

66-09 

It  seems  superfluous  to  comment  on  such  figures  as 
these.  A  treasury  administration  that  permits  the  credit 
of  a  wealthy  people  to  decline  so  that  its  obligations  fall 
fifty  per  cent  and  remain  there  for  a  year,  can  hardly  be 
called  successful.  Yet  the  results  here  displayed,  as  also 
the  forced  circulation  of  treasury  notes,  follow  naturally 
from  the  attempt  to  carry  through  a  war  by  loans. 

But  the  lesson  of  these  public  accounts  is  not  fully  ap- 
preciated until  it  is  observed  with  what  ease  a  system  of 
internal  revenue  may  be  made  to  respond  to  a  vigorous 
and  decided  administration,  for  this  shows  how  unneces- 
sary it  is  to  rely  wholly  upon  public  credit  for  extraordi- 
nary expenditures.  In  this  connection  the  following  table 
is  pertinent  for  our  consideration. 

76 


Table  showing  receipts  from  various  sources,  for  fiscal  years, 
in  denominations  of  millions. 


1861. 

1863. 

186a. 

1864. 

1865. 

:8cc. 

Customs  revenue 

Internal  revenue 

Miscellaneous 

89-6 
'  V-9 

490 
1-7 
1-1 

69-0 

39-1 

4-5 

102-3 

110-2 

52-1 

84-9 

210-6 

38-2 

179-0 

311-2 

67-8 

Clear  revenue 

From  loans 

41-5 
23-7 

51-9 
4336 

112-6 
695-6 

264-6 
696-0 

333-7 
864-8 

558-0 
92-6 

Total  revenue.... 

65-2 

485-5 

708-2 

960-6 

1,198-5 

650-6 

It  requires  no  extended  study  to  discover  the  meaning 
of  these  figures.  The  criticism  which  they  offer  makes  its 
appearance  when  one  asks  what  would  probably  have  been 
the  financial  consequences  could  the  receipts  from  internal 
revenue  have  been  moved  ahead  two  years.  Suppose,  for 
example,  that  Secretary  Chase  could  have  received  from 
this  source  $110,000,000  in  1862,  $210,000,000  in  1863,  and 
$311,000,000  in  1864;  what  a  change  would  it  have  pro- 
duced upon  the  course  of  financial  administration!  Its 
moral  effect  upon  the  South,  working  especially  through 
her  European  sympathizers,  would  have  brought  the  war 
to  a  more  speedy  termination,  the  credit  of  the  govern- 
ment could  not  have  suffered  as  it  did,  while  the  advocates 
of  legal-tender  money  would  have  been  deprived  of  the 
argument  of  necessity.  Now  the  responsibility  for  the 
tardy  flow  of  revenue  from  internal  duties  is  traceable  to 
the  policy  upon  which  the  finances  of  the  war  were  set  on 
foot,  and  not  to  the  inability  or  the  reluctance  of  the  coun- 
try to  pay.  Secretary  Chase  denied  the  necessity  of  meet- 
ing any  part  of  war  expenditure  from  war-taxes,  because 
the  financial  theory  which  he  espoused  deprecated  the 
endeavor;  and  it  required  nearly  three  years  of  disastrous 
treasury  management  to  convert  the  administration  and 
Congress  from  this  erroneous  theory.  In  view  of  actual 
conditions,  it  is  perhaps  a  little  extravagant  to  suppose 
that  the  receipts  from  internal  revenue  could  have  been 
moved  ahead  two  years,  but  it  is  altogether  reasonable  to 
conclude  that  a  vigorous  administration  might  have  an- 
ticipated actual  results  by  eighteen  months. 

77 


This  estimate  allows  nearly  a  year  for  the  establish- 
ment of  the  system,  and  claims  only  that  internal  revenue 
should  have  begun  to  come  into  the  treasury  at  the  rate  of 
$9,000,000  a  month  as  early  as  July,  1862.  And  when  it  is 
noticed  how  quickly  the  industries  of  the  country  re- 
sponded to  the  laws  of  1864,  as  shown  by  the  receipts  for 
the  year  1865,  one  can  not  regard  this  claim  as  at  all  im- 
practicable. There  is  here  disclosed  the  fundamental 
error  of  that  theory  which  looks  to  credit  as  the  only  source 
of  war  expenditures.  It  is  blindly  optimistic,  and  so  dep- 
recates an  appeal  to  sources  of  revenue  that  might  with 
ease  be  opened.  They  who  undertake  its  administration 
are  sure  to  let  matters  drift  until  financial  disaster  awakens 
them  to  the  fact  that  the  financial  problem  is  no  longer 
under  their  control.  This  theory  springs  from  financial 
ignorance,  from  a  sense  of  administrative  weakness,  and 
from  a  thorough  distrust  of  the  people. 

It  appears,  then,  that  the  history  of  the  war  of  1861, 
like  that  of  1812,  bears  direct  testimony  against  the  suf- 
ficiency of  the  loan  policy.  It  is  no  apology  for  the  men 
who  administered  public  affairs  that  they  looked  upon  the 
Rebellion  as  a  local  insurrection,  for,  in  matters  of  public 
financiering,  revenue  must  conform  to  necessary  expendi- 
ture ;  and  no  policy  can  meet  approval  which  fails  to  sup- 
ply all  the  money  that  is  needed  for  as  long  a  time  as  it  is 
needed. 

What  is  the  true  plan  for  the  financial  manage- 
ment of  a  war  ? 

Thus  far  our  argument  has  proceeded  according  to  the 
logic  of  exclusion.  We  have  learned  that  the  tax  policy 
does  not  conform  to  well-known  principles  of  human  na- 
ture, and  that  the  loan  policy  fails  to  bear  the  test  when 
tried;  but  since  taxes  and  loans  are  the  only  sources  of 
revenue  open  to  modern  financiers,  it  follows  that  the  true 
policy  must  embrace  them  both.  Our  further  study, 
therefore,  must  concern  itself  with  inquiring  what  con- 
stitutes a  reasonable  union  of  taxes  and  loans. 

We  shall  be  assisted  in  answering  this  question  if  we 
notice,  at  the  outset,  certain  fiscal  principles  or  truths  that 

78 


point  to  the  correct  theory  of  treasury  management.  First, 
the  habit  of  bearing  taxes  is  one  easily  acquired,  if  only  the 
instruction  be  given  in  a  proper  manner.  It  is  never  nec- 
essary to  depend  altogether  upon  loans  for  war  expenditure, 
and  the  administration  that  shrinks  from  a  levy  of  taxes, 
lest  the  war  spirit  be  chilled,  shows  either  a  doubtful  cause 
or  a  weak-kneed  cabinet.  As  a  second  principle  may  be 
stated  the  fact  that  it  is  easier  to  raise  the  rate  of  existing 
taxes  than  to  establish  a  new  system  of  duties.  From  this 
it  follows  that  the  germ  of  a  war  policy  lies  back  in  the 
treasury  policy  of  ordinary  times.  Again,  it  is  popular 
support,  rather  than  the  adherence  of  a  syndicate  of  banks, 
which  insures  the  success  of  a  financial  policy.  This  is 
true,  because  popular  sentiment  in  favor  of  the  adminis- 
tration guarantees  the  support  of  the  banks,  but  it  is  not 
true  that  the  support  of  the  banks  brings  with  it  general 
enthusiasm.  This  does  not  mean  that  banks  should  never 
be  employed  as  agents  of  the  government,  but  that  the 
administration  should  be  superior  to  the  criticisms  of  the 
banking  interest,  that  the  basis  of  its  operations  should  be 
as  broad  as  possible,  and  that  it  is  no  sign  of  weakness  to 
appeal  to  patriotism  as  a  motive  for  lending  money.  And, 
lastly,  it  is  a  truth  worth  remembering  that  demo- 
cratic peoples  are  willing  to  go  all  lengths  with  a 
government  which  takes  them  into  its  confidence. 
It  is  assumed  that  the  purpose  of  the  war  is  ap- 
proved, otherwise  there  is  no  apology  for  undertak- 
ing it;  but,  granting  this,  personal  sacrifice  and 
assistance  are  assured  to  a  government  so  long  as 
the  public  continues  to  have  confidence  in  the 
efficiency  of  its  administration.  The  meaning  of  this 
fact  is,  that  an  adequate  financial  policy  should  be  bold, 
courageous,  sufficient,  and  simple;  that  it  should  lie  close 
to  the  sympathies  of  the  people,  and  not  fear  to  make  from 
them  searching  demands.  We  have  now  before  us  the 
raw  material  out  of  which  to  construct  a  plan  for  the 
financial  management  of  a  war. 

Coming  then  directly  to  the  question  in  hand,  it  is  of 
prime   necessity   to   recognize   that   good   financiering  in 

79 


times  of  emergency  is  only  possible  upon  the  basis  of  an 
adequate  revenue  system  previously  established.  It  has 
been  already  stated  that  some  preparation  in  time  of  peace 
should  be  made  against  the  advent  of  war,  but  that  the 
assignment  of  a  particular  tax  to  this  purpose,  or  the  ac- 
cumulation of  a  war-reserve,  does  not  accord  with  the 
most  perfect  financial  requirements.  How,  then,  may 
the  peace  establishment  provide  against  unusual  demands? 
Nothing  more  is  required  for  this  purpose  than  that  the 
permanent  system  should  be  so  adjusted  as  to  respond 
quickly  to  any  change  in  rates  imposed,  and  this  can  be 
easily  done  by  fixing  the  ordinary  rate  of  taxation  below 
the  maximum  revenue  rate.  But,  if  the  actual  rate  of 
taxation  in  ordinary  times  be  at  or  above  the  maximum 
revenue  rate,  the  administration  can  hope  for  no  assistance, 
in  case  of  an  emergency,  from  established  taxes.  Under 
such  circumstances  the  government  is  embarrassed  at  the 
outset,  and  easily  persuades  itself  that  an  appeal  to  credit 
is  the  only  method  for  making  headway  against  demands. 
But  let  it  be  supposed,  on  the  other  hand,  that  the  country 
possesses  a  broad  system  of  taxation,  so  that  ordinary  de- 
mands may  be  met  by  imposing  light  duties,  any  embar- 
rassment encountered  by  the  minister  of  finance  at  the 
beginning  of  a  war  must  be  of  his  own  making. 

But,  assuming  such  provisionary  measures  to  have 
been  taken,  what  is  the  next  step  in  an  adequate  war 
policy?  ^ 

Our  answer  may  be  given  without  hesitation.  New 
sources  of  revenue  must  be  opened  by  the  levy  of  new 
taxes.  But,  it  may  be  asked,  is  not  such  a  proposal  a 
virtual  abandonment  of  the  loan  policy?  This  can  not  be 
admitted ;  for  it  is  essential  that  a  law  should  be  passed  to 
provide  for  clear  revenue,  in  addition  to  that  secured  by 
raising  the  rate  upon  existing  taxes,  before  a  financier  has 
any  right  to  assume  that  he  can  borrow  large  sums  without 

1  Were  this  question  asked  for  the  United  States,  the  answer  might  be  given 
more  expHcitly.  In  view  of  the  peculiar  relation  existing  between  the  Federal 
government  and  the  several  States,  there  are  many  reasons  for  saying  that  this 
first  tax  should  be  a  direct  tax  upon  the  States,  apportioned  and  collected  on  the 
principle  of  "revolutionary  requisitions." 

80 


Four  la  France 

VERSEZ  VOTRE  OR 


Ms 


/ 


/ 


k  k' 


V 


^ 


COr  Combat  FourLaMctoire 


The  Most  Popular  Fre.nxh  War  Loax  Po^tkk 


depressing  public  credit.  He  can  not  rely  entirely  upon 
the  new  revenue  derived  from  the  old  taxes,  because  this 
revenue  is  not  co-existent  with  the  debts  created.  A  true 
financial  policy,  also,  must  hold  in  view  the  termination  of 
the  war  as  well  as  its  continuance,  and  do  nothing  which 
can  in  any  manner  obstruct  the  speedy  reduction  in  the 
rate  of  permanent  taxes  upon  a  return  of  peace.  For,  if 
the  extraordinary  income  from  the  permanent  taxes  be 
mortgaged  to  the  support  of  a  permanent  debt,  the  first 
claim  of  a  good  revenue  system  is  disregarded.  The 
elastic  quality  of  the  system  would  be  thereby  destroyed, 
and  the  country  would  be  poorly  prepared  to  meet  another 
fiscal  emergency.  And  it  must  be  further  noticed  that 
these  new  taxes,  once  established  and  brought  into  running 
order,  are  ready  at  hand  to  assist  in  the  expungement  of 
debts  when  the  war  shall  have  terminated.  It  thus  ap- 
pears that  the  new  taxes  tend  to  strengthen  public  credit, 
even  before  they  become  remunerative;  they  relieve  the 
temporary  revenue  derived  from  permanent  taxes,  so  that 
it  may  again  serve  as  the  temporary  basis  of  new  loans; 
and  they  assume  the  whole  weight  of  the  debt  upon  a 
return  of  peace. 

It  may  be  objected  to  the  plan  here  proposed  that, 
should  the  struggle  prove  of  slight  duration  and  little  cost, 
the  country  is  burdened  with  useless  taxes;  but  this  ob- 
jection seems  to  be  made  without  due  consideration.  As- 
suming the  difficulty  to  be  quickly  terminated,  it  is  more 
than  probable  that  the  strong  financial  policy  adopted  by 
the  administration  rendered  great  assistance  in  attaining 
so  desirable  an  end.  If  a  destructive  war  can  be  obviated 
by  the  voting  of  taxes,  there  are  few  who  would  withhold 
their  assent.  Nor  is  it  necessary,  in  the  case  assumed, 
that  the  taxes  should  prove  an  actual  burden  to  the  people. 
New  taxes  require  some  considerable  time  before  they  be- 
come productive,  and,  should  the  occasion  for  them  pass 
away,  they  may  be  abolished  before  taking  much  from  the 
pockets  of  the  people.  Let,  then,  no  financier  argue  that 
w^ar-demand  will  probably  be  small,  and  that  it  may  be 
met  by  loans  without  an  appeal  to  taxes;  for  the  adminis- 
tration certainly  needs  the  moral  influence  of  the  tax-laws, 

81 


the  revenue  which  these  laws  are  capable  of  bearing  may  be 
required,  and,  if  the  events  show  the  solicitude  of  the  ad- 
ministration to  have  been  groundless,  no  great  harm  is  done. 

It  remains  for  us  to  consider  what  use  should  be  made 
of  public  credit,  and  to  discover  the  principle  according  to 
which  the  extraordinary  expenditure  should  be  appor- 
tioned between  loans  and  taxes.  The  theory  of  public 
borrowing  is  very  simple.  Public  credit  should  always  be 
regarded  as  a  means  of  anticipating  revenue.  It  is  a  short 
cut  to  capital,  and  the  first  great  service  of  loans  in  time  of 
war  is  to  give  the  administration  immediate  control  over 
capital  upon  the  declaration  of  hostilities.  But  such  bor- 
rowing does  not  necessarily  create  a  permanent  debt.  It 
rests,  in  the  first  instance,  upon  the  extraordinary  receipts 
arising  from  the  increase  of  rate  in  the  permanent  revenue 
system.  Should  the  war,  however,  continue  for  any  con- 
siderable time,  it  would  be  necessary  to  convert  the  debt 
thus  created  into  a  permanent  or  time  debt,  and  assign  it 
to  new  funds  for  support.  And  here,  it  may  be  said,  is  the 
only  point  at  which  ignorance  of  the  probable  duration  of 
the  extraordinary  demands  may  be  permitted  to  influence 
the  financial  policy  of  the  administration.  It  is  proper, 
until  the  future  may  be  forecast  with  some  degree  of  cer- 
tainty, that  temporary  debts  rather  than  permanent  debts 
should  be  used.  And  here,  too,  is  disclosed  the  peculiar 
service  rendered  by  an  elastic  revenue  system,  for  the  quick 
command  which  such  a  system  grants  over  revenue  pro- 
vides a  solid  basis  of  credit  at  the  beginning  of  a  war,  and 
so  insures  a  good  price  for  the  first  bonds  negotiated. 

But  there  is  another  and  more  important  service  that 
may  be  rendered  by  loans.  When  a  government  gives 
bonds  in  return  for  capital,  the  individual  who  supplies  the 
capital  does  not  feel  that  sense  of  personal  loss  which  at- 
tends the  payment  of  a  tax.  He  has  merely  changed  the 
character  of  his  property.  It  thus  appears  that  by  means 
of  loans  a  government  may  hope  to  secure  immediate  con- 
trol over  large  funds  of  capital  while  yet  allowing  the 
motives  for  continued  industry  full  liberty  of  action.  So 
far  as  it  seems  necessary  to  use  credit  for  attaining  this 

82 


end,  the  obligations  created  against  the  state  must  run  for 
some  considerable  time,  and  be  assigned  to  a  reliable 
fund  for  the  payment  of  the  annual  interest  which  they 
demand. 

In  the  services  here  brought  to  view  lies  the  entire 
theory  of  public  credit.  Loans  are  always  a  means  of 
anticipating  assured  revenue.  No  other  meaning  can  be 
attached  to  them  when  used  to  carry  through  the  financial 
operations  of  a  war,  for  no  system  has  yet  been  devised  for 
evading  the  necessity  of  extraordinary  taxes  as  the  result 
of  extraordinary  expenditures.  Our  general  conclusion 
then  is,  that  sound  financial  management  inclines  always 
toward  taxes.  The  measure  of  the  amount  that  may  be 
secured  by  this  means  is  found  in  their  observed  effect 
upon  current  industry,  for  the  demand  for  clear  revenue 
must  never  go  so  far  as  to  discourage  industrial  activity. 

It  is  impossible  to  proceed  much  further  in  a  general 
discussion  of  this  subject,  for  the  conflicting  interests  to  be 
harmonized,  and  the  varying  importance  of  the  factors 
that  enter  into  the  problem,  must  influence  greatly  the 
application  of  the  principles  suggested.  It  may,  however, 
be  permitted  to  take  one  step  in  the  direction  of  formulat- 
ing a  rule  of  wide  application  for  the  financial  conduct  of  a 
war,  by  which  the  relative  use  to  be  made  of  taxes  and 
loans  may  be  roughly  indicated.  At  the  beginning  of 
hostilities,  revenue  from  loans  may  properly  outbalance 
revenue  from  taxes,  but,  as  the  war  progresses  and  the 
demands  increase,  taxes  should  be  continually  forced  into 
greater  prominence.  There  are  several  considerations 
that  favor  this  rule.  Thus  the  necessity  for  temporary 
loans  is  always  greater  at  the  beginning  of  a  war  than  at 
any  subsequent  period.  As  the  newly  levied  taxes  become 
more  and  more  productive,  and  as  the  people  become  ac- 
customed to  high  rates  of  payment,  the  legitimate  use  of 
loans  is  narrowed.  But  the  most  forcible  reason  favoring 
the  rule  is  the  following:  The  greatest  stress  which  the 
advent  of  a  war  throws  upon  industries  arises  from  the 
necessary  re-adjustment  of  labor  to  new  lines  of  demand. 
It  is  this  point  which  is  not  duly  appreciated  by  writers 
upon  finance.     They  do  not  perceive  that  the  strain  upon 

83 


a  treasury  policy  comes  at  the  beginning  of  a  war.  A 
condition  of  war  is  not  a  condition  of  peace  from  any  point 
of  view,  and  the  industrial  transition  from  the  one  to  the 
other  is  always  attended  with  danger  and  may  prove  the 
occasion  of  disaster.  But,  if  the  financier  can  only  bridge 
over  this  chasm  and  establish  business  firmly  on  a  war 
basis,  he  may  extend  his  taxing  system  with  as  much  con- 
fidence as  if  the  people  were  living  in  a  state  of  profound 
peace.  It  is  during  this  period  of  re-adjustment  that 
public  credit  renders  its  greatest  service  to  the  adminis- 
tration. At  no  future  time  during  the  continuance  of 
a  war  can  such  strong  reasons  be  urged  in  favor  of  its  em- 
ployment. 

It  seems,  then,  that  the  theory  for  the  adminis- 
tration of  a  treasury  during  the  continuance  of  a 
war  contemplates,  first,  the  formation  of  a  financial 
policy  at  the  time  when  hostilities  are  first  declared ; 
and,  second,  the  development  of  the  policy  after  in- 
dustries are  well  adjusted  to  belligerent  conditions. 
And,  as  has  been  set  forth  in  the  foregoing  analysis, 
the  formation  of  the  policy  demands  the  legaliza- 
tion of  three  fiscal  measures. 

1.  The  rate  of  taxation  in  the  permanent  revenue 
system  must  be  raised.  The  new  income  thus  secured 
will  serve  as  the  basis  of  the  first  loans,  and,  when  re- 
lieved by  other  funds,  may  be  employed  as  a  contingent 
fund  or  as  a  source  of  war  expenditure.  Nothing  must 
be  done  to  endanger  the  repeal  of  this  measure  upon  a 
return  of  peace. 

2.  New  sources  of  revenue  must  be  opened  by  the 
levy  of  new  taxes.  The  estimated  proceeds  of  these  taxes 
must  exceed,  if  possible,  the  demands  of  loans  for  interest 
payment.  This  will  assist  in  maintaining  the  credit  of  the 
state,  it  will  give  some  revenue  for  war  purposes  while  hos- 
tilities continue,  and  will  provide  revenue  for  the  expunge- 
ment of  the  debt  when  the  demands  for  war  expenditure 
shall  have  ceased. 

3.  A  large  loan,  equal  to  the  satisfaction  of  all  possi- 
ble demands,   must  be  authorized,  and  the  minister  of 

84 


finance  must  be  granted  large  discretionary  powers  in  its 
placement.  In  this  manner  there  is  created  the  machinery 
for  financial  operations,  and  under  a  strong  administration 
there  is  little  fear  of  failure. 

The  principles  which  control  the  development  of  the 
policy  are  the  same  as  those  which  shaped  its  establish- 
ment. If  temporary  loans  were  resorted  to,  they  should 
be  funded  upon  the  proceeds  of  the  new  taxes  as  soon  as 
possible.  The  financier  may  hope  for  assistance  from  his 
new  taxes  within  eighteen  months  of  their  levy,  and,  if 
demands  continue  to  expand,  his  call  for  clear  revenue 
should  be  gradually  increased  until  revenue  machinery  be 
speeded  to  its  highest  productive  capacity.  But  there  is  a 
limit  to  possible  war  consumption,  and,  with  a  gradually 
increasing  income  from  taxes,  clear  revenue  must  eventu- 
ally overtake  any  possible  demand. 

This  theory  of  treasury  management  may,  perhaps, 
be  more  clearly  apprehended  if  stated  with  the  assistance 
of  the  following  diagram: 


In  this  figure  the  horizontal  lines,  in  the  direction  from 
left  to  right,  measure  the  productivity  of  revenue  machin- 
ery, while  the  perpendicular  distance  from  the  top  repre- 
sents the  time  through  which  it  operates.  Thus  the  line 
A  B  shows  the  intensity  of  the  demand  made  upon  the 
permanent  revenue  establishment  in  time  of  peace,  and, 
since  the  line  A  J  covers  one  year's  time,  the  parallelogram 
A  K  represents  the  normal  income  for  a  year.  The  first 
measure  upon  the  outbreak  of  a  war  should  be  to  increase 


85 


the  rate  imposed  upon  the  peace  establishment.  Let  it 
then  be  increased  byB  C.  If,  now,  the  permanent  system 
has  been  formed  according  to  correct  principles,  and  is 
elastic  in  character,  this  advance  in  the  rate  of  imposition 
will  yield  increased  revenue;  but,  since  it  is  necessary 
properly  to  advertise  such  a  change,  it  is  assumed  that  this 
addition  to  clear  receipts  will  not  make  its  appearance 
till  the  beginning  of  the  second  year.  It  follows,  then, 
that  the  entire  war  demand  of  the  first  year  must  come 
from  loans.  This  is  represented  in  the  figure  by  the  paral- 
lelogram K  D.  There  is  no  danger,  however,  but  that 
this  stock  will  bear  good  prices,  because  it  rests  upon  in- 
come assured  by  revenue  machinery  already  in  operation. 
The  fund,  which  sustains  the  credit  of  the  government 
during  the  second  year,  is  represented  by  the  parallelo- 
gram K  P,  from  which  it  appears  that  the  entire  receipts 
flowing  from  the  permanent  establishment  during  the 
second  year  is  equal  to  the  parallelogram  /  P.  During  the 
second  year,  also,  the  newly  established  taxes  begin  to  lend 
their  assistance  in  carrying  on  financial  operations,  and  the 
income  from  this  source  is  represented  by  the  triangle 
M  P  W.  This  revenue  is  shown  as  beginning  in  the 
middle  of  the  second  year,  because  it  will  probably  take 
eighteen  months  to  bring  an  entirely  new  system  into 
working  order.  It  thus  appears  that  a  large  share  of  the 
extraordinary  expenditure  of  this  year  also  must  be  se- 
cured from  loans,  which  is  represented  in  the  diagram  by 
the  figure  L  M  W  R  N.  But  with  the  beginning  of  the 
third  year  it  may  be  assumed  that  the  industrial  re-ad- 
justment has  taken  place,  and  the  financier  may  con- 
stantly and  persistently  extend  his  demand  for  clear  rev- 
enue; and,  since  there  is  a  limit  to  war  consumption,  the 
necessity  of  loans  decreases  with  every  increase  in  clear 
revenue.  Thus  the  total  revenue  for  the  third  year  is 
represented  by  the  parallelogram  0  F,  of  which  clear 
revenue  provides  a  sum  represented  by  the  figure  0  S  V  W 
the  remainder  being  supplied  by  loans.  In  the  fourth 
year,  of  a  total  expenditure  represented  by  E  Z  T  S,  loans 
are  called  upon  to  furnish  the  comparatively  small  sum  of 
V  HZ  T.     It  lies  as  an  essential  part  of  the  treasury  policy 

86 


here  defended  that  the  newly  estabhshed  system  of  taxa- 
tion should  be  continuously  expanded  until  financial 
exigencies  shall  have  passed  away;  and  this  may  be 
brought  about  either  by  a  return  of  peace  or  by  the  fact 
that  clear  revenue  has  overtaken  war  demands.  It  is 
useless  to  say  that  this  is  impossible:  it  is  perfectly  feasi- 
ble, provided  only  a  strong  and  vigorous  policy  be  adopted 
at  the  beginning  of  the  war.  The  difhcult  part  of  the  task 
imposed  upon  the  financier  is  during  the  first  and  second 
years  of  the  war.  At  this  time  there  is  demand  for  wisdom 
and  firmness,  for  no  administration  can  recover  itself  if  it 
indulge  in  weakness  and  inefhciency  at  the  time  when  a 
policy  is  set  on  foot. 

Our  conclusion,  then,  respecting  the  appropri- 
ate financial  policy  for  the  conduct  of  a  war  is  the 
follovs^ing :  Reliance  can  not  be  placed  wholly  upon 
loans  nor  wholly  upon  taxes,  but  fiscal  administra- 
tion should  be  so  adjusted  as  gradually  to  change 
the  burden  of  expenditure  from  credit  to  clear 
income. 


87 


PART   IV. 


Bonds  and  Taxation 


Bonds  and  Taxation 


THE  WEALTH  OF  THE  BELLIGERENT 

NATIONS 

In  determining  upon  a  policy  of  national  taxation  one 
absolute  limit  to  all  calculations  must  be  a  country's  total 
taxable  income.  The  table  on  page  94  gives  an  approxima- 
tion to  this  total  in  comparative  form. 

Such  figures,  however,  are  subject  to  important  lim- 
itations. The  matter  has  been  briefly  discussed  from  the 
point  of  view  of  the  United  States  in  a  recent  issue  of  "The 
Economic  World"  of  New  York,  from  which  we  quote  the 
following  paragraphs: 

"Nobody  knows  with  absolute  precision  the  sum-total, 
in  terms  of  money,  of  the  annual  income  of  the  population 
of  the  United  States.  The  most  competent  estimate,  per- 
haps, is  that  of  Professor  W.  I.  King,  who,  in  his  most  in- 
teresting book,  'The  Wealth  and  Income  of  the  People  of 
the  United  States,'  put  it  at  $30,580,000,000  for  the  year 
1910.  Naturally,  there  has  been  an  increase  since  1910; 
and  if  the  rate  of  increase  shown  from  1900  to  1910  has 
been  maintained  down  to  1917 — though  this  is  highly 
doubtful — the  total  income  of  the  population  of  the  United 
States  in  1917  should  be  between  $38,000,000,000  and 
$40,000,000,000.  Here,  then,  is  the  absolute  maximum 
that  could  conceivably  be  drawn  upon  through  taxation  to 
pay  the  going  expense  of  the  war.  As  has  been  shown, 
however,  much  the  largest  part  of  this  maximum  is  un- 
available as  the  subject-matter  of  direct  taxation.  To  a 
very  moderate  extent,  indeed,  it  can  almost  all  be  touched 
by  indirect  taxation,  particularly  taxation  on  the  con- 
sumption of  things  in  general  use,  but  not  absolute  neces- 
sities of  life.  The  natural  limitations  upon  this  kind  of 
taxation,  or  the  results  obtained  from  it,  are  marked,  as 
the  British  have  discovered.  For  the  increase  of  taxation 
reduces  the  consumption  and  hence  the  yield  of  the  tax. 
Thus  heavy  increases  in  the  excise  duties  in  Great  Britain 

91 


in  1916  actually  reduced  the  yield  from  these  taxes  for  the 
year  by  £5,000,000,  as  compared  with  the  yield  in  1915, 
and  brought  them  £10,000,000  below  the  sum  estimated 
in  the  budget  as  their  probable  yield. 

"That  part  of  the  total  national  income,  then,  which 
appertains  to  the  great  majority  of  any  population  is  vir- 
tually beyond  the  reach  of  severe  direct  taxation,  on  po- 
litical and  social  grounds;  and  at  the  same  time  compar- 
atively little  can  be  derived  from  it  through  indirect 
taxation.  Only  a  certain  remainder  of  the  national  in- 
come can  in  effect  be  subjected  to  that  direct  and  at  the 
same  time  quickly  operative  taxation  which  will  give  the 
huge  sums  of  money  in  hand  required  by  a  government  to 
meet  a  considerable  part  of  the  current  cost  of  a  great  war. 
At  the  same  time,  it  is  an  all-important  question  what  this 
remainder  may  be  in  the  United  States,  if  the  plan  is  to  be 
carried  through  of  paying  anything  like  one-half  the  cur- 
rent expense  of  the  war  with  Germany  from  the  proceeds 
of  national  taxation. 

"We  have  but  two  determinate  figures  upon  which  to 
base  an  estimate  of  the  amount  of  this  remainder.  We 
know  from  the  Federal  corporation  tax  returns  for  1915- 
1916  that  the  entire  amount  of  the  earnings  of  all  the  cor- 
porations in  the  United  States  in  that  fiscal  year  was 
$5,184,442,389.  We  know  also  that  the  sum-total  of  the 
'normal'  personal  income  taxes  collected  in  the  same  fiscal 
year  was  $23,995,777  (though  supertaxes  brought  the 
grand  total  of  collections  up  to  about  $67,760,000).  Inas- 
much as  the  'normal'  tax  is  1  per  cent  of  the  taxable  in- 
come, we  are  able  to  deduce  that  the  aggregate  amount 
of  the  taxable  personal  incomes  in  the  country, — i.  e. 
those  in  excess  of  the  statutory  exemption  limit, — was 
$2,399,577,700.  Of  course,  if  the  exemption  limit  were 
reduced,  say,  to  $2,000,  the  sum-total  of  taxable  personal 
incomes  would  be  considerably  increased,  perhaps  by 
enough  to  bring  this  sum-total  up  to  $5,000,000,000.  But, 
be  it  remembered,  these  corporation  and  personal  incomes 
included  all  the  'profits'  made  in  the  country  in  1915- 
1916,  save  those  smaller  than  the  exemption  limit  for  in- 
dividuals.    The  important  fact,  however,  is  that  we  can 

92 


count  on  no  other  remainder  of  the  total  national  income, 
upon  which  direct  war  taxation  can  be  imposed,  except  the 
sum  of  the  total  earnings  of  our  corporations  and  of  the 
total  taxable  income  of  individuals.  And  this  sum  is  about 
$7,500,000,000  with  the  present  exemption  limit  for  in- 
dividual incomes,  or,  say,  $10,000,000,000  with  that  limit 
reduced  to  $2,000.  If  the  war  with  Germany  assumes  the 
guise  for  us  that  it  has  for  Great  Britain  or  France,  quite 
one-half  of  this  grand  total  of  taxable  income  will  be 
required  to  pay  one-half  the  annual  expense  we  must 
meet.  The  effects  of  so  radical  a  reduction  of  what  may 
be  called  the  economically  effective  part  of  the  national 
income  upon  the  general  economy  of  the  country  may 
easily  be  imagined." 

In  the  subjoined  table  it  will  be  observed  that  the 
wealth  of  the  Entente  Allies  before  the  entrance  of  the 
United  States  into  their  midst  is  estimated  at  244  billions 
of  dollars  and  their  combined  national  income  at  28.5 
billions.  Their  total  borrowings  are  to  date  46  billions 
or  61%  above  the  annual  income  and  represent  a  mortgage 
of  18.8%  on  their  total  wealth.  The  wealth  of  Germany 
and  its  Allies  is  estimated  at  134  billions  of  dollars;  their 
combined  income  17  billions  and  their  borrowings 
$23,630,000,000.  The  latter  item  is  equivalent  to  17.6% 
of  their  combined  wealth  and  39%  above  their  combined 
income. 

With  the  addition  of  the  United  States  to  the  ranks  of 
the  Entente,  matters  are  considerably  changed.  The 
present  national  income  of  the  United  States  is  estimated 
very  conservatively  at  38  billions  of  dollars  and  its  wealth 
at  220  billions.  In  other  words,  the  resources  of  the 
Entente  in  terms  of  dollars  and  cents  have  been  doubled 
by  the  action  of  the  United  States  in  taking  up  the  cudgels 
in  behalf  of  democracy.  On  the  basis  of  the  present  bor- 
rowings of  belligerent  nations,  it  is  fairly  evident  that  the 
United  States  could  borrow  without  difficulty,  as  a  future 
mortgage  on  its  wealth,  to  the  extent  of  40  billions  and 
could  then  maintain  its  financial  integrity  equally  as  well 
as  any  of  the  most  successful  European  belligerents. 

93 


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94 


LOANS  OF  THE  BELLIGERENT  COUNTRIES 

L     United  States 

On  March  31,  1917,  the  national  debt  of  the  United 
States  was  composed  of  the  following  items: 

National  Debt,  March  31,  1917 ' 

Debt  bearing  no  interest  (including  U.  S. 
notes,  national  bank  notes,  federal  reserve 
notes,  etc.) $257,227,466' 

Debt  on  which  interest  has  ceased  since  ma- 
turity (payable  on  presentation) 1,459,630 

Interest  bearing  debt  (as  a  result  of  loans 

issued  under  various  acts) 1,023,357,250 

GROSS  DEBT .$1,282,044,346 

Balance  available  to  pay  maturing  obliga- 
tions    74,216,460 

NET  DEBT $1,207,827,886 

The  annual  interest  charge  on  the  interest  bearing 
debt  was  $23,084,635  for  the  year  ending  June  30,  1916. 

2.     United  Kingdom 

Consisting  predominately  of  the  heritage  of  past  wars, 
the  aggregate  gross  liabilities  of  the  United  Kingdom  of 
Great  Britain  and  Ireland  were  composed  of  the  following 
items  on  March  31,  1914: 

National  Debt,  March  31,  1914^ 

Funded  Debt £586,7 17,872 

Terminable  Annuities 29,552,219 

Unfunded  Debt ' 35,000,000 

Total  Dead  Weight  Debt £651,270,091 

Other  Capital  Liabilities , .      56,384,019 

AGGREGATE  Gross  LIABILITIES £707,654,110 

1  Financial  Statement  of  the  United  States  Government,  March  31,  1917. 

2  After  deducting  gold  reserve  of  $152,979,025. 

3  Parliamentary  Paper  No.  Cd.  7426. 

4  Including  treasury  bills  temporarily  paid  ofT  out  of  the  exchequer  balances. 
For  purposes  of  comparison  they  must  be  included  in  the  liabilities  existing  at  the 
end  of  the  year. 

95 


To  meet  the  unforeseen  expenditure  resulting  from 
the  outbreak  of  the  war  in  August,  the  government  re- 
sorted to  the  issue  of  treasury  bills.  The  situation  called 
for  a  war  budget  and  on  November  17,  1914,  Mr.  Lloyd 
George  presented  the  appended  statement  of  the  revised 
estimates  for  the  year: 

Estimates  1914-1915,  presented  November,  1914' 

Estimated  expenditure  on  peace  basis £206,924,000 

Estimated  war  expenditure 328,443,000 

Total  1914-1915 £535,367,000 

Estimated  revenue  on  existing  basis 195,796,000 

To  be  provided £339,571,000 

Additional  resources: 

By  new  taxation £15,500,000 

By  suspension  of  the  new  sink- 
ing fund 2,750,000 

18,250,000 

Impending  deficit £321,321,000 

The  Chancellor  announced  that  the  deficit  would  be 
met  by  borrowing.  By  renewing  the  treasury  bills  ex- 
piring during  the  year,  the  amount  to  be  raised  by  addi- 
tional loans  would  be  reduced  to  £230,321,000.  However, 
the  Chancellor  considered  it  advisable  to  raise  sufficient 
funds  to  finance  the  government  through  the  following 
June,  so  the  first  war  loan  was  fixed  at  £350,000,000. 

This  loan  provided  for  an  issue  of  £350,000,000  of 
war  stock  or  bonds  at  95,  bearing  interest  at  3}/^%.  It  was 
to  be  repaid  at  par  on  March  1,  1928,  with  the  possibility 
of  repayment  at  any  time  on  or  after  March  1,  1925,  at  the 
option  of  the  government.^  An  undue  strain  upon  the 
money  market  was  avoided  by  spreading  the  payment  of 
subscriptions  over  a  period  of  five  months  ending  April 
26,  1915,  with  two  ten  per  cent  installments  each  month. 
As  an  added  feature,  the  Bank  of  England  agreed  that 

1  Debates,  House  of  Commons,  Vol.  68,  col.  350. 

2  Prospectus  of  the  War  Loan,  November  17,  1914. 

96 


until  March  1,  1918  it  would  advance  against  the  deposit 
of  war  stock  or  bonds,  amounts  equal  to  the  issue  price, 
at  a  rate  of  interest  one  per  cent  below  the  current  bank 
rate.^     The  loan  was  oversubscribed. 

The  condition  of  the  debt  at  the  close  of  the  financial 
year  is  indicated  below: 

National  Debt,  March  31,  1915' 

.  .  Increase  or  decrease 

Amount  ^^^.^^  1914-1915 

Funded  Debt £583,290,097  -£3,427,775 

Terminable  Annuities 28,040,721  -1,511,498 

Unfunded  Debt ' 497,486,258  +462,486,258 

Other  Capital  Liabilities. . .  56,984,626  +600,607 

AGGREGATE  GROSS 

LIABILITIES.  .  .  .    £1,165,801,702  +£458,147,592 

The  notable  increase  which  had  taken  place  in  the  un- 
funded debt  as  a  result  of  the  War  Loan  Act  of  1914  was 
the  outstanding  feature  among  the  debt  transactions  of  the 
year. 

Under  this  act  there  had  been  created: 
By  issue  of  War  Stock  and 

Bonds £350,000,000 

By  issue  of  Exchequer  Bonds      50,000,000 
By    issue   of   Treasury    Bills 

(net) 66,500,000 

£466,500,000 

But  there  had  been  redeemed  during  the  year: 

War  Stock  and  Bonds £909,242 

Exchequer  Bonds  issued  un- 
der various  acts 3,104,500 

~  4,013,742 

Net  increase  in  the  Unfunded  Debt   £462,486,258 

In  budgeting  for  another  year  of  war,  Mr.  Lloyd 
George  presented  the  following  statement: 

1  Debates,  House  of  Commons,  Vol.  68,  col.  374. 

2  Pari.  Paper  No.  Cd.  7994. 

3  Including  treasury  bills  temporarily  paid  off. 

97 


Estimates  for  1915-1916 


1 


Total  estimated  expenditure £1,136,434,000 

Revenue  on  existing  basis  of 

taxation £267,232,000 

By    suspension    of    the    new 

sinking  fund 3,780,000 

By  additional  taxation 3,100,000 

274,112,000 

Impending  deficit £862,322,000 

In  the  latter  part  of  June,  1915  Mr.  McKenna  pointed 
out  that  the  realized  deficit  up  to  March  31,  1915  had 
totaled  £334,000,000.2  From  March  31  until  June  19, 
1915  there  had  been  a  further  deficit  of  £184,000,000, 
making  a  total  of  £518,000,000  which  had  been  met  by 
receipts  other  than  revenue.  The  first  war  loan  had  pro- 
vided £331,000,000;  exchequer  bonds,  £48,000,000;  and 
treasury  bills  £235,000,000,  making  £614,000,000  in  all. 
Exchequer  bonds  paid  off  reduced  this  total  to  £597,448,000 
of  which  about  £80,000,000  was  on  hand.  However,  as  a 
result  of  the  assumption  of  liabilities  of  the  Bank  of 
England  and  the  rapid  increase  in  expenditure,  a  new 
loan  was  necessary. 

It  did  not  seem  desirable  to  use  treasury  bills  for  this 
purpose ;  so  the  second  war  loan  consisted  of  an  offer  of  an 
unspecified  amount  of  4J/2%  stock  and  bonds  at  par.^ 
The  loan  was  to  terminate  definitely  on  December  1, 1945, 
with  earlier  redemption  at  the  option  of  the  Government 
on  or  after  December  1,  1925.  Provision  was  made  for 
bonds  in  denominations  ranging  as  low  as  £5  to  £25  to 
be  issued  through  the  Post  Office,  and  5s.  vouchers  were 
also  arranged  for.  In  the  event  of  future  war  loan  issues, 
stock  and  bonds  of  this  issue  were  to  be  accepted  at  par 
plus  accrued  interest  as  the  equivalent  of  cash  for  pur- 
poses of  subscription  for  such  issues, '  For  the  benefit  of 
holders  of  other  government  stocks  desiring  to  subscribe 

1  Debates,  Commons,  Vol.  71,  col.  1009. 

2  Debates,  Commons,  Vol.  72,  col.  951. 

3  Prospectus,  June  21,  1915. 

98 


to  the  new  loan,  a  series  of  options  was  offered.  Advan- 
tage of  this  opportunity  of  converting  other  forms  of 
government  debt  into  the  new  loan  was  taken  to  the 
extent  indicated  below,  according  to  an  announcement  of 
the  Chancellor.^ 

Amount  for  Conversion    ^l^™"^/''''''"^ 

prior  to  conversion 

Consols £204,000,000  £536,101,161 

24%  Annuities 7,500,000  29,812,405 

1%%  Annuities 1,000,000  3,813,566 

^^%  War  Loan 135,000,000  350,000,000 

In  the  Fall,  a  five-year  Anglo-French  external  loan  of 
$500,000,000,  dated  October  15,  1915,  and  bearing  interest 
at  5%  was  placed  in  the  United  States. 

When  the  final  balance  sheet  for  1915-1916  was  pre- 
sented it  showed  an  expenditure  of  £1,559,000,000  and  a 
revenue  of  £337,000,000.  The  deficit  had  been  met  by 
borrowing  approximately  six  hundred  million  pounds  by 
the  second  war  loan,  one  hundred  and  fifty-four  million 
pounds  by  the  sale  of  exchequer  bonds,  fifty  million  pounds 
by  the  Anglo-French  loan  and  the  balance  by  treasury 
bills. ^  The  results  of  these  various  transactions  as  they 
affected  the  debt  are  given  below.^ 

National  Debt,  March  31,  1916 

Amount  ^ """^^^^  %  i1f 'i  n^T 

during  1915-1916 

Funded  Debt £318,460,277  -£264,829,820 

Terminable  Annuities .  .  26,158,871  -1,881,850 

Unfunded  Debt 1,796,129,496  -f-1, 298,643, 238 

Other  Capital  Liabilities  56,690,601  -294,025 

£2,197,439,245     +£1,031^637^ 

The  enormous  increase  in  the  unfunded  debt  had 
occurred  in  the  following  manner: 


1  The  Economist  (London),  July-Dec,  1915,  p.  853. 

2  Debates,  Commons,  Vol.  81,  col.  1051. 

3  Pari.  Paper  No.  Cd.  8334. 


99 


Unfnnded  Debt  Increased  1915-1916 

Under  the  War  Loan  Act,  1915: 
By  issue  43/2%  Stock  and 

Bonds £900,831,583 

By  issue  5%  Exchequer 

Bonds 155,371,195 

By  issue  Treasury  Bills  (net)  493,427,000 
By  issue  War  Saving  Cer- 
tificates         1,387,191 

By  issue  Other  Debt 9,246,575 

Under    the    American    Loan 

Act,  1915 51,369,863 

Ways   and   Means  Advances 

(net) 19,896,500 

£1,631,529,907 

Unfunded  Debt  Reduced  1915-1916 

3K%  War  Stock  and  Bonds  .  £286,316,358 
43^%  War  Stock  and  Bonds. .  834,511 

Exchequer  Bonds 45,735,800 

332,886,669 

Net  Increase  in  Unfunded  Debt  1915- 

1916 £1,298,643,238 

Mr.  McKenna's  estimates  for  1916-1917  called  for: 

Total  expenditure £1,825,000,000^ 

Revenue 502,000,000 

To  be  met  by  borrowing £1,323,000,000 

Heavy  issues  of  treasury  bills  were  made  through  the 
year,  the  amount  outstanding  in  September  1916  being 
over  a  billion  pounds.  Other  forms  of  loans  were  resorted 
to  also.  In  August,  a  two-year  American  collateral  loan 
of  £50,000,000,  dated  September  1,  1916,  was  announced 
at  5%.  It  was  followed  by  another  American  loan  of 
£60,000,000,  for  three  and  five  years,  dated  November  1, 
1916  and  bearing  interest  at  S}/2%.     In  December  a  loan 

1  Actual  expenditure  April  1,  1916  to  March  31,  1917,  £2,198,112,710. 
Actual  revenue  April  1,  1916  to  March  31,  1917,  £573,427,582. 

100 


of  £10,000,000  at  6%  was  placed  in  Japan  in  the  form  of 
three-year  exchequer  bonds. 

By  the  thirtieth  of  December,  1916,  the  national 
debt,  including  about  £760,000,000  loaned  to  allies  and 
dominions,  was  approximately  £3,461,852,000/  It  was 
not  destined  to  remain  at  that  figure  long  for  in  January, 
1917,  the  prospectus  of  the  third  great  war  loan  appeared. 
This  offered  two  propositions  to  the  public.  One  con- 
sisted of  a  five  per  cent  loan,  redeemable  1929-1947, 
issued  at  95.  The  other  was  a  4  per  cent  loan,  redeem- 
able 1929-1942,  issued  at  par  with  interest  tax  free.  The 
amount  of  these  loans  was  not  specified.  Provision  was 
made  for  a  sinking  fund  of  ^  of  1%  a  month  of  the 
amount  of  each  loan.  This  fund  was  to  be  used  for  pur- 
chasing stock  or  bonds  of  either  loan  for  cancellation  when 
the  market  price  fell  below  the  price  of  issue.  Whenever 
the  unexpended  balanceofthissinking  fund  was  £10,000,000, 
further  accumulation  was  to  cease  for  the  time  being. 

According  to  an  announcement  by  Mr.  Bonar  Law, 
the  subscriptions  to  the  third  war  loan  were  as  follows: 

Amonnt  Subscribed  to  1917  War  Loan^ 

Applications  through  the  Bank  of  England  £819,586,000 

Treasury  Bills  converted 130,711,950 

Applications  through  the  Post  Ofiice 30,715,000 

War  Saving  Certificates  purchased 19,300,000 

£1,000,312,950 

Of  the  amount  applied   for  only    £22,000,000  was  sub- 
scribed to  the  tax  free  loan. 

Before  the  close  of  the  financial  year  1916-1917  an- 
other collateral  loan,  consisting  of  one  and  two-year  notes 
dated  February  1,  1917  and  amounting  to  $250,000,000 
and  bearing  interest  at  53^2%  was  issued  in  the  United 
States. 

1  On  May  2,  1917,  in  introducing  the  fourth  war  budget  Mr.  Bonar  Law 
said  that  since  the  beginning  of  the  war  $4,110,000,000  had  been  advanced  to 
Great  Britain's  aUies  and  $710,000,000  to  her  dominions. 

2  The  Economist  (London),  March  3,  1917,  p.  424. 

101 


War  Borrowings  of  the  British  Government^ 
August  1,  1914— March  3,  1917 

4%  and  5%  War  Loan  of  1917 £605,560,000 

War  Savings  5-Yr.  Certificates 67,300,000 

"Other  Debt" 137,400,000 

Treasury  Bills 630,760,000 

War  Expenditure  2-Yr.  Certificates 26,879,000 

Ways  and  Means  Advances 125,046,000 

3M%  War  Loan,  1925-1928 331,798,000 

3%  Exchequer  Bonds,  1920 31,547,000 

41^%  War  Loan,  1925-1945 582,630,000 

5%  U.  S.  A.  Loan  (October  1915) 50,820,000 

5%  U.  S.  A.  Coll.  Loan  (September  1916)  50,000,000 

5J^%  U.  S.  A.  Coll.  Loan  (October  1916).  60,000,000 
5%  Exchequer  Bonds: 

Due  October  1919 34,263,000 

Due  December  1920 237,829,000 

Due  October  1921 62,496,000 

6%  Exchequer  Bonds 160,952,000 

£3,195,280,000 

3.     Loans  of  Other  BelKgerent  Nations 

The  tables  given  below  of  the  loans  of  other  belliger- 
ent nations  from  the  beginning  of  the  war  to  the  end  of 
December  1916  are  taken  from  the  Journal  of  Commerce^ 
and  are  supplemented  by  available  information  on  loans 
since  that  time.  Unless  otherwise  indicated  these  tables 
are  in  terms  of  dollars: 

a.  Canada 

British  government  loan  to  Canada $200,000,000 

Ten-Year  43/^%  in  London 25,000,000 

One  and  Two- Year  5%  in  U.  S 45,000,000 

Five,   Ten   and   Fifteen-Year   5%   in   U.   S. 

(April,  1916) 75,000,000 

Internal  Ten-Year  5i^%  (November  1915) .  100,000,000 
Internal  Fifteen-Year  5%  (September  1916)  100,000,000 
Provincial  and  municipal 120,500,000 

$665,500,000 

1  The  Statist,  March  10,  1917,  p.  397.    This  table  does  not  appear  to  include 
the  $250,000,000  Anglo-American  Loan  of  February,  1917. 

2  January  2,  1917. 

102 


A  new  $150,000,000  twenty-year  loan,  dated  March  1, 
1917  has  been  heavily  oversubscribed.  It  is  a  5%  loan, 
issued  at  96.  The  use  of  war  saving  certificates  has  been 
instituted  in  Canada,  and  by  the  middle  of  March  1917 
,099,565  three-year  certificates  had  been  sold. 


b.  India 

Government  internal  4% $15,000,000 

Treasury  bills  in  London 17,500,000 

$32,500,000 

A  new  five  per  cent  Indian  loan  of  £100,000,000  with 
maturity  1929-1947  has  been  announced  in  London 
recently. 

c.  Australia 

5's  in  London $10,000,000 

Internal  loan 50,000,000 

Second  internal  loan .    250,000,000 

$310,000,000 

A  41^%  loan  of  $90,000,000  offered  in  January  1917 
was  oversubscribed.  A  loan  of  £3,500,000  at  5J/^%  has 
been  reported  since  that  time,  and  South  Australia  has 
issued  a  small  loan  to  meet  bonds  maturing  this  year. 

d.  France 

National  Loan,  5%,  November  1915 $3,100,000,000 

National  Loan,  5%,  October  1916 2,275,000,000 

National  Defence  Bonds,  estimated 2,800,000,000 

National  Defence  Obligations     "       400,000,000 

Advances  from  Bank  of  France 2,000,000,000 

Advances  from  Bank  of  France   to   foreign 

governments 250,000,000 

Bonds  and  notes  in  London 500,000,000 

Advances  from  Bank  of  Algiers 20,000,000 

Loans  in  U.  S .  695,000,000 

$12,040,000,000 

France  placed  a  collateral  loan  in  America,  dated 
April   1,   1917  and  amounting  to  $100,000,000.     It  is  a 

103 


two-year  loan  at  53^%.  In  March,  arrangements  were 
pending  for  an  issue  of  a  French  loan  in  Tokio  to  pay  for 
war  munitions.     The  amount  was  $13,000,000  at  6%. 

e.  Russia 

War  Loan,  5%,  October  1914 $257,500,000 

War  Loan,  5%,  February  1915 257,500,000 

Exchequer  Bonds,  4%,  March  1915 310,000,000 

Currency  Loan,  April  1915 105,000,000 

War  Loan,  5i^%,  May  1915 515,000,000 

War  Loan,  53/^%,  November  1915 515,000,000 

War  Loan,  5}/^%,  April  1916 1,040,000,000 

War  Loan,  S]/2%,  November    1916,  estim- 
ated   1,000,000,000 

Treasury  Bills,  5%,  estimated 2,000,000,000 

Issues  discounted  in  England 700,000,000 

Issues  in  France 150,000,000 

Loan  in  Japan 25,000,000 

Three-Year  6^%  credit  in  U.  S 50,000,000 

Loan  in  U.  S.,  6% 50,000,000 

Acceptances  in  U.  S.    (since  paid) 25,000,000 

Credit  to  Russian  Asiatic  Bank  in  U.  S..  .  25,000,000 
Treasury   Notes,   in   U.  S.  5%,   One-Year 

(since  paid) 10,000,000 

$7,035,000,000 

Since  January  1,  1917,  Russia  has  renewed  treasury 
bills  expiring  and  has  announced  another  great  war  loan. 
The  amount  ofTered  was  not  limited  and  the  probable 
amount  subscribed  has  been  placed  at  $1,500,000,000. 
The  loan  will  pay  5%  interest  and  is  tax  exempt. 

f.  Italy 

National  Loan,  43^%,  December  1914. .  .  .  $200,000,000 

War  Loan,  4}^%,  July  1915 200,000,000 

Twenty-five-Year  5's,  approximate 1,200,000,000 

Treasury  Coupon  Bonds,  5% 250,000,000 

English  Credit  for  War  Supplies 250,000,000 

One- Year  6%  Notes  in  U.  S 25,000,000 

$2,125,000,000 

104 


Since  the  first  of  January,  Italy  has  offered  an  un- 
limited 5%  perpetual  loan  at  90.  It  is  tax  free  and  in- 
convertible prior  to  1931.  Subscriptions  have  exceeded 
3,600,000,000  lire.  (1  lire =$0.19295  at  fixed  rate  of  ex- 
change). 

^.  Germany 

Imperial  Loan,  5%,  September  1914 $1,120,000,000 

Imperial  Loan,  5%.  March  1915 2,265,000,000 

Imperial  Loan,  5%,  September  1915 3,040,000,000 

Imperial  Loan,  5%,  March  1916 2,678,000,000 

Imperial  Loan,  5%,  September  1916 2,675,000,000 

Securities  in  U.  S.,  estimated 25,000,000 

Bank  Loan  in  Sweden 10,000,000 

Notes  in  U.  S.,  5%,  nine  months,   paid.  .  10,000,000 

Notes  in  U.  S.,  6%  basis,  due  April  1917.  10,000,000 

$11,833,000,000 

The  treasury  bills  expiring  in  April  have  been  renewed 
and  another  great  war  loan  has  been  announced.  The 
latter  is  in  the  form  of  an  imperial  5%  loan  at  98,  irre- 
deemable before  1924,  and  exchequer  bonds  with  interest 
at  43/^%  at  the  same  price.  The  bonds  are  redeemable  by 
drawings  from  January  1,  1918  at  110  per  cent.  The 
total  of  the  new  war  loan  has  been  unofficially  reported  as 
$3,103,110,000. 

h.  Anstria-Hnn^ary 

Austrian  Loan,  5}4%,  November  1914. . .  .  $445,000,000 

Austrian  Loan,  5}i%,  June  1915 560,000,000 

Austrian  Loan,  5}i%,  November  1915. . .  .  815,000,000 

Austrian  Loan,  53^%,  May  1916 565,000,000 

Austrian  Loan,  5^/^%,  Dec.  1916,  estimated  500,000,000 

Hungarian  Loan,  6%,  November  1914 244,000,000 

Hungarian  Loan,  6%,  June  1915 223,000,000 

Hungarian  Loan,  6%,  November  1915. .  .  .  240,000,000 

Hungarian  Loan,  6%,  Dec.?1916,  estimated  250,000.000 

Loan  from  German  bankers 113,000,000 

Second  loan  in  Germany 125,000,000 

Credit  in  Germany 60,000,000 

$4,140,000,000 

105 


According  to  an  official  announcement  the  new  money 
in  the  fifth  Austro-Hungarian  loan,  December  1916,  was 
4,464,610,000  kronen  which  is  considerably  higher  than 
the  total  estimate  of  $750,000,000  given  above  (1  krone 
=  $0.20263  at  fixed  rate  of  exchange).  A  sixth  Austrian 
war  loan  is  expected  shortly. 

A  complete  statement  of  the  public  debt  of  the  bellig- 
erent nations  resulting  from  war  financing  is  impossible 
at  this  time.  The  best  available  tabulation  of  public 
debts  now  obtainable  has  been  furnished  informally  by 
the  Bureau  of  Foreign  and  Domestic  Commerce.  It  has 
not  previously  been  published. 

The   Public    Debts    and    Annnal    Debt    Charges    of    European 

Belligerent  Countries^ 

[Compiled  by  the  Research  Division  of  the  Bureau  of  Foreign  and 
Domestic  Commerce,  Department  of  Commerce^ 


Officially  Reported 

Estimated 
Jan.  1,  1917 

Debt 

Date 

Amount 

Charge 

United  Kingdom2 

France 

Russia 

Italy 

Austria- Hungary 
Germany 

Mar.  31,  1916 
Jan.      1,  1914 
Jan.      1,  1916 
Dec.  31,  1916 
Aug.     1,  1914 
Sept.  30,  1916 

$10,694,000,000 
6,348,000,000 
8,649,000,000 
4,718,000,000 
4,123,000,000 
12,158,000,000 

$46,690,000,000 

$16,847,000,000 

16,035,000,000 

12,127,000,000 

4,718,000,000 

8,263,000,000 

13,382,000,000 

$619,000,000 
580,000,000 
371,000,000 
191,000,000 
352,000,000 
849,000,000 

Total 

$71,372,000,000 

$2,962,000,000 

United  Kingdom.  The  net  borrowing  of  the  British  Government  from  be- 
ginning of  the  war  to  January  1,  1917  has  totaled  $13,789,707,000.  The 
estimate  of  debt  on  January  1,  1917  is  based  on  data  pubhshed  in  the 
Economiste  European  of  February  9,  1917.  The  figure  of  debt  includes 
about  3,700  million  dollars  advanced  to  Allies  and  British  dominions.  The 
amount  of  debt  charges  represents  the  official  estimate  for  the  fiscal  year 
ending  March  31,  1917.     Actual  payments  appear  to  be  somewhat  higher. 

France.  The  net  increase  in  the  public  debt  from  the  beginning  of  the  war  to 
August  31,  1916  has  been  officially  reported  as  $7,757,153,000.  The  figure 
of  debt  charges  represents  payments  made  in  1916.  For  the  first  half  of 
1917  an  appropriation  of  415  million  dollars  has  been  asked  by  the  Ministry' 
of  Finance. 

1  The  debt  of  Canada  was  $328,485,000  July  31,  1914  and  $867,771,000 
December  31,  1916.     Journal  of  Commerce,  ]3in\iaTy  3\,  1917. 

2  Mr.    Bonar    Law    stated    May    2,    1917  that   the    national   debt   was 
$19,270,000,000,  less  advances  to  the  allies  and  dominions. 


106 


Russia.     The  amount  of  debt  charges  represents  the  budget  estimate  for  1917 

Italy.  The  amount  of  debt  charges  represents  the  sum  actually  paid  in  1916. 
The  figures  are  from  the  Gazzetta  Ufificiale. 

Germany.  The  figures  of  debt  relate  to  the  Empire  only,  the  debt  of  the  various 
States  not  being  included.  As  some  of  the  war  charges  are  borne  by  the 
States  the  figures  do  not  include  the  total  war  debt.  The  debt  service  as 
shown,  including  interest,  amortization,  management  and  other  charges, 
represents  the  budget  estimates  for  the  fiscal  year  ending  March  31,  1918. 

Austria-Hungary.  The  estimate  of  the  debt  does  not  include  uncovered  paper 
money  in  circulation.  The  amount  of  the  latter  has  been  estimated  un- 
ofiicially  at  about  2,500  million  dollars. 

TAXATION 

Introductory 

Before  proceeding  to  describe  in  detail  the  tax  meas- 
ures introduced  as  a  result  of  the  war,  it  might  be  well  to 
glance  at  the  tax  situation  before  the  opening  of  hostilities, 
in  order  to  understand  the  possibilities  that  suggested 
themselves  to  the  legislators  at  a  time  when  greater 
elasticity  in  revenue  was  sorely  needed.  The  following 
table  summarizes  the  yield  of  the  various  taxes,  arranged 
under  the  four  general  heads,  in  1912:  ^ 

Revenue  of  France,  Germany  and  England  from  Taxation 
in  1912.     (In  millions  of  dollars). 


France 

Germany 

England 

Source 

Percentage 

Percentage 

Percentage 

Revenue 

of  Total 
Revenue 

Revenue 

of  Total 
Revenue 

Revenue 

of  Total 
Revenue 

1.  Taxes  on  \Vealth2    . 

360 

47% 

290 

43% 

417 

54% 

2.  Protective  Duties^   . 

76 

9.9% 

104 

15.4% 

3 

0.4% 

3.  Taxes    on    Harmful 

Consumption  and 

Pure  Luxuries^    . . 

175 

22.6% 

89 

13.2% 

197 

25.1% 

4.  Taxes  on  Necessary 

Consumption^     .  . 

156 

20.5% 

192 

28.4% 
100.0% 

159 

20.5% 

Total 

767 

100.0% 

675 

776 

100.0% 

1  Pierre  Leroy-Beaulieu,  Les  Impdts  et  les  Revenus  en  France,  en  Angleterre 
et  en  Allemagne,  Paris  1914,  pp.  55-58. 

2  In  this  category  are  included  taxes  on  incomes,  successions  and  transfers, 
registration  duties  and  stamp  taxes. 

3  Many  of  the  items  which  would  ordinarily  fall  in  the  category  of 
customs  duties  are  distributed  among  the  two  following  divisions  according  as 
they  are  taxes  on  harmful  consumption  and  pure  luxuries  or  taxes  on  useful  con- 
sumption. The  actual  revenue  from  customs  duties  in  1912  was  168  million 
dollars  in  England,  164  million  dollars  in  Germany  and  132  million  dollars  in 
France. 


107 


It  is  evident  that  England  has  relied  considerably 
more  on  taxes  levied  on  wealth,  than  either  France  or 
Germany.  Taxes  on  necessary  or  useful  consumption 
yielded  a  greater  revenue  in  Germany  than  elsewhere 
whereas  taxes  on  harmful  consumption  and  pure  luxuries 
played  a  less  important  role  in  the  fiscal  realm  of  Germany 
than  of  France  or  England.  Germany  derived  a  greater 
proportion  of  its  revenue  from  protective  duties  than 
France. 

I.     United  States 

The  receipts  and  expenditures  of  the  United  States 
for  the  last  four  fiscal  years  have  been  as  follows: 


Receipts  and  Expenditures  of  the  United  States 


1913 

1914 

1915 

1916 

A.  Receipts 

Customs 

Internal  Revenue  . 

Ordinary 

Emergency   (Oct- 
ober  22    1914). 

$318,891,395.86 
309,410,665.81 

$292,320,014.51 
308,659,732.56 

$209,786,672.21 

283,398,760.85 

52,069,126.29 

39,155,596.77 

41,046,162.09 

2,167,136.47 
70,287,372.90 

$213,185,845.63 

303,486,474.04 

84,278,302.13 

Corporation      In- 
come Tax 

Individual     In- 
come Tax 

35,006,299.84 

43,127,739.89 

28,253,534.85 

2,571,774.77 
59,740,370.13 

56,993,657.98 
67,943,594.63 

Sales      of      Public 

Lands 

Miscellaneous .... 

2,910,204.69 
57,892,663.64 

1,887,661.80 
51,889,016.28 

Total       Ordinary 
Revenue 

Public    Debt    Re- 
ceipts   

Postal  Revenues.  . 

724,111,229.84 

23,400,850.00 
266,619,525.65 

734,673,166.71 

23,021,222.50 
287,934,565.67 

697,910,827.58 

22,486,955.00 
287,248,165.27 

779,664,552.49 

58,452,402.50 
312,057,688.83 

Total  Receipts. .  . 
B.  Expenditures  in- 
cluding postal  .  .  . 

Surplus 

1,014,131,605.49 

1,010,812,448.78 
3,319,156.71 

1,045,628,954.88 

1,045,600,861.09 
28,093.79 

1,006,349,780.54 

1,063,792,290.29 

* 57, 442, 509 -75 
♦Deficit 

1,153,044,639.10 

1,072,894,093.23 
80,150,545.87 

With  the  opening  of  the  Great  European  struggle  in 
1914,  the  treasury  of  the  United  States  was  seriously 
affected  and  Congress  adopted  the  Emergency  Revenue 
Act  in  October,  imposing  an  elaborate  system  of  stamp 
duties  to  meet  the  impending  deficit  of  the  year.     This 


108 


Act  was  subsequently  repealed  and  was  later  superseded 
by  other  measures  which  were  intended  to  yield  consider- 
ably more  revenue  with  less  administrative  difficulty.  The 
following  is  a  detailed  account  of  the  war  tax  legislation 
now  in  force: 

A.  Income  Tax.     The  rates  were  raised  in  the  following  manner:  2%  on  incomes 

exceeding  $3000,  if  the  recipient  is  single,  and  $4000,  if  married,  but  not  ex- 
ceeding $20,000;  on  incomes  above  $20,000  to  $40,000,  1%  super-tax; 
$60,000-$80,000,  3%;  $80,000-$  100,000,  4%;  $100,000-$  150,000,  5%; 
$150,000-8200,000,  6%;  $200,000-$250,000,  7%;  $250,000-$300,000,  8%; 
$300,000-8500,000,9%;  $500,000-$  1,000,000,  10%;  $1,000,000-$  1,500,000, 
11%;  $l,500,000-$2,000,000,  12%;  and  on  incomes  above  $2,000,000,  13%. 

B.  Estate  Tax.     The  sum  of  $50,000  is  exempt  in  every  case.      The  rates  are: 

1.5%  on  taxable  inheritances  of  $50,000  or  less;  3%  on  sums  ranging  be- 
tween $50,000  and  $150,000;  4.5%  on  $150,000-$250,000;  6%  on  $250,000- 
$450,000;  7.5%  on  $450,000-$  1,000,000;  9%  on  $l,000,000-$2,000,000; 
10.5%,  on  $2,000,000-$3,000,000;  12%  on  $3,000,000-$4,000,000;  13.5% 
on  $4,000,000-$5,000,000  and  15%  on  amounts  in  excess  of  five  millions. 

C.  Munition  Manufacturers'  Tax.     A  tax  of  12.5%  is  levied  on  the  net  profits 

derived  from  the  manufacture  of  gunpowder,  cartridges,  projectiles,  firearms, 
electric  motor  boats,  etc. 

D.  Capital  Stock  Tax.     A  tax  is  imposed  amounting  to  50c.  for  every  $1000  of 

the  face  value  of  the  capital  stock  of  any  enterprise,  including  the  surplus 
and  undivided  profits.     The  sum  of  $99,000  is  exempt. 

E.  Licenses. 

Brokers $30 

Pawnbrokers $50 

Ship  brokers $20 

Custom  House  brokers $10 

Theatres,  Museums  and  Concert  Halls 

Seating  capacity  of  250  or  less $25 

Seating  capacity  250-500 $50 

Seating  capacity  500-800 $75 

Seating  capacity  above  800 $100 

Proprietors  of  Circuses $100 

Proprietors  of  Bowling  Alleys  and  Billiard  Rooms.   $5  for  each  alley  or  table 
Manufacturers  of  Tobacco 

If  annual  sale  does  not  exceed  50,000  lbs.   $3 

If    50,000-100,000  lbs $6 

If  100,000-200,000  lbs $12 

If  above  200,000  lbs 8c.  per  1000  lbs. 

Manufacturers  of  Cigars 

If  annual  sale  is  50,000  cigars  or  less  ....   $2 

If    50,000-100,000 $3 

If  100,000-200,000 $6 

If  200,000-400,000 $12 

If  above  400,000 5c.  per  M. 

Manufacturers  of  Cigarettes 3c.  per  10,000 

F.  Excess  Profits  Tax.     Every  corporation  or  partnership  must  pay  a  tax  of 

8%  on  the  amount  by  which  its  net  income  from  all  sources  exceeds  (a) 
$5000  and  (b)  8%  of  the  capital  invested  and  employed  in  the  business. 

109 


The  capital  invested  embraces  the  actual  cash  paid  in,  the  actual  cash  value 
of  other  assets  at  the  time  of  paying  the  tax  and  the  paid  in  or  earned 
surplus  and  undivided  profits. 

G.  Internal  Revenue  Charges. 

Beer $1.50  per  bbl.  of  31  gals. 

Wine If  it  contains  14%  of  absolute  alcohol  or 

less 4c.  per  gal. 

If  it  contains  14%  to  21% 10c.     "     " 

If  it  contains  21%  to  24% 25c.     "     " 

If  it  contains  more  than  24%,  it  is  taxed 
as  distilled  spirits. 

Sparkling  Wines,  etc.  (additional  stamp  tax) 

Champagne 3c.  each  half-pint 

Carbonated  Wine IJ^c.     "  "     " 


II.     Great  Britain 

Immediately  upon  the  entrance  of  Great  Britain  into 
the  European  conflict,  the  Chancellor  of  the  Exchequer 
clearly  enunciated  the  policy  of  defraying  a  considerable 
part  of  the  expenditures  for  war  purposes  by  means  of 
taxation.^  The  rates  of  the  income  tax  for  the  remainder 
of  the  year  1914  were  doubled,  and  were  again  raised  in 
1915  and  in  1916.  The  customs  and  excise  duties  were 
altered  so  as  to  yield  a  greater  revenue  than  heretofore. 
In  1915-1916,  a  new  tax  was  imposed  on  excess  profits 
arising  as  a  result  of  the  war.  The  latter  source  has 
proved  to  be  extremely  lucrative,  even  beyond  the  most 
liberal  expectations  of  the  Chancellor. 

Although  Great  Britain  has  been  unable  to  emulate 
its  feats  of  the  Napoleonic  Wars  when  forty  per  cent  of  its 
expenditures  is  said  to  have  been  met  by  taxation,  its 
present  efforts  that  are  directed  along  the  same  lines  are 
none  the  less  noteworthy,  as  they  are  singular.  It  is  de- 
riving an  income  from  taxation  that  exceeds  by  all  odds 
the  tax  revenue  of  any  other  belligerent  country.  The 
following  table  shows  the  tax  and  non-tax  revenue  of 
Great  Britain  during  the  War  as  compared  with  the  nor- 
mal year  1913-1914:  ^ 

1  Cf.  Lloyd  George's  Budget  Speech,  Parliamentary  Debates  {Commons), 
N.  S.  Vol.  68,  columns  348  et  seq. 

2  These  figures  are  taken  from  Finance  Accounts  of  the  United  Kingdom, 
1913-1914,  1914-1915,  and  1915-1916.  The  statistics  for  parts  of  a  fiscal  year 
were  secured  from  the  Economist  (London),  April  7,  1917,  p.  618. 

110 


Revenue  of  Great  Britain  Before  and  During  the  War 


SOURCES 

1913-1914 

Aug.  1,  1914,  to 
Mar.  31.  1915 

1915-1916 

1916-1917 

1.  Taxation: 

Customs 

Excise 

Estate,  etc.  Duties 

Stamps 

Land  Tax 

House  Duty  .... 

Income  Tax 

Excess  Profits  .  .  . 
Land  Value  Duty 

£35,568,580 

39,657,957 

27,165,122 

9,983,363 

690,006 

1,944,400 

47,240,770 

'  734,892 

£27,613,492 

30,827,167 

18,170,570 

4,375,792 

i      2,288,067 

'    62,508,854 

'  363',96i 

£59,575,610 

61,207,683 

30,937,982 

6,779,998 

2,654,865 

129,160,589 
187,846 
368,816 

£70,561,000 

56,380,000 

31,232,000 

7,878,000 

2,580,000 

205,033,000 
139,920,000 

Total 

162,985,090 
35,338,354 

151,411,191 

20,347,553 

290,873,389 
46,465,608 

513,584,000 

2.  Non-Tax: 

Revenue  i  

59,843,582 

Grand  Total. .  . 

198,323,444 

171,758,744 

337,338,997 

573,427,582 

The  excise  duties  have  not  responded  as  well  as  might 
be  expected  but  this  is  due  to  the  fact  that  the  tax,  added 
to  the  high  prices  that  already  existed,  discouraged  con- 
sumption. The  estate,  stamps,  house  and  land  value 
duties  have  either  remained  stationary  in  yield  or  have 
declined.  The  revenue  from  the  income  tax,  on  the  other 
hand,  has  more  than  quadrupled  since  1913-1914.  The 
receipts  from  the  income  tax  in  1916-1917  alone  exceed 
the  total  tax  revenue  during  the  normal  year  1913-1914, 
and  combined  with  the  excess  profits  duty,  it  is  greater 
than  the  total  income  from  taxation  during  1915-1916. 
The  non-tax  revenue  has  almost  doubled  since  the  fiscal 
year  1914. 

The  income  tax  and  the  excess  profits  duty  afforded 
the  greater  part  of  the  absolute  increase  in  the  total  re- 
ceipts during  1916-1917.  In  1913,  the  total  receipts  were 
£198,323,444  and  in  1916-1917  (up  to  March  17,  1917) 
they  were  £573,427,582— an  increase  of  £375,104,138.  To 
this  increase,  the  income  tax  contributed  £157,792,230  or 
42%  of  the  sum,  and  the  excess  profits  duty  £139,920,000 
or  37.3% — together  79.3%  of  the  total  increase  in  revenue 
since  1913-1914. 

When  the  expenditure  side  of  the  accounts  is  exam- 
ined, it  is  found  that  owing  to  the  war,  this  item  has  in- 

1  This  item  embraces  post-office  (telegraph  and  telephone  included),  crown 
lands,  Suez  Canal  shares,  and  miscellaneous. 


Ill 


creased  about  twenty-one  fold  above  normal  in  1913.  The 
table  that  is  here  given  aims  to  show  the  total  receipts 
from  all  sources  and  the  expenditures  for  the  respective 
years  or  parts  of  years: 

Receipts  and  Expenditures  of  Great  Britain  ^ 


YEAR 

Total  Receipts 

Total  Expenditures 

1.  1913-1914 

£198,242,897 

171,758,744 

336,766,824 

573,427,582 

1,081,953,388 

£197,492,968 

2.  August  1,  1914-March  31,  1915 

3.  1915-1916 

498,359,980 
1,559,158,377 

4.   1916-1917 

2,198,112,710 

5.  Grand  Total  August  1,  1914-March  31,  1917 

4,255,631,067 

The  average  daily  expenditure  for  the  period  begin- 
ning with  the  opening  of  hostilities  to  the  close  of  the  fiscal 
year  1914  was  £2,050,864;  in  1915,  it  was  £4,271,666,  and 
in  the  fiscal  year  1916  it  rose  to  £6,022,226,  or  an  increase 
of  193%  above  the  daily  average  in  1914.^ 

In  relating  revenue  to  expenditure,  interesting  and 
highly  instructive  results  are  obtained.  During  the  per- 
iod between  August  1,  1914  and  March  31,  1915,  the  ex- 
penditures were,  to  recapitulate,  £498,359,980  and  the  to- 
tal revenue  was  £171,758,744  or  34.4%  of  the  expenditures. 
Inthefiscalyear  1915,  theexpenditureswere  £1,559,158,377, 
and  the  revenue  £336,766,824  or  21.6%.  In  spite  of  the  in- 
crease in  the  revenue,  the  ratio  dropped  and  this  was  in 
great  part  due  to  the  marked  rise  in  the  expenditure  side 
which  was  totally  unforeseen  at  the  time.  In  the  year 
1916,  the  expenditures  were  £2,198,112,710  and  the  rev- 
enue receipts  were  £573,427,582  or  26.0%  of  the  former. 
For  the  whole  period  of  the  war,  from  August  1,  1914  to 
March  31,  1917,  the  expenditures  were  £4,255,631,067 
and  the  receipts,  £1,081,953,388  or  25.4%  of  the  former. 
It  is  found,  however,  that  in  the  expenditure  accounts 
are  included  the  loans  to  Allies  and  Dominions,  which 
are  estimated  to  amount  to  964  million  pounds  up  to 
March   31,    1917.     Since   these  loans  are   issued  by  the 

1  Finance  Accounts,  and  Economist  (London)  for  April  7,  1917  op.  cit. 

2  These  figures  already  include  expenditures  to  aid  the  Allies  and 
Dominions. 

112 


British  Government  on  its  own  credit  and  since  they 
comprise  a  part  of  its  national  obligations,  it  is  not 
wholly  justifiable  to  omit  this  entire  sum  from  the  ex- 
penditure accounts,  especially  when  the  interest  charges 
will  have  to  be  met  in  no  small  measure  by  Great  Britain 
herself,  as  in  the  case  of  Belgium,  Serbia  and  Montenegro. 
In  some  instances,  it  is  highly  doubtful  whether  these  loans 
will  ever  be  repaid.  Assuming,  however,  that  the  con- 
trary is  true  and  that  the  estimate  of  964  millions  is  cor- 
rect, the  revenue  that  has  already  flowed  into  the  national 
coffers  has  defrayed  32.8%  of  the  total  net  expenditure 
from  the  beginning  of  the  war  to  March  31,  1917.  The 
significance  of  this  statement  is  manifest  on  the  surface 
and  requires  no  further  comment. 

A  detailed  analysis  of  the  changes  effected  in  the  tax 
systems  of  Great  Britain  in  effect  May  1,  1917  follows.  It 
will  be  noticed  that  w^iile  England  has  retained  its  free 
trade  policy,  the  customs  duties  were  as  a  rule  considerably 
raised  on  those  commodities  that  had  already  been  subject 
to  such  imposts  before  the  present  conflict  began. ^ 

A.  Income  Tax:  The  general  exemption  was  reduced  to  incomes  below  £130. 
Relief  of  £120  is  granted  if  income  does  not  exceed  £400;  £100,  if  between 
£400  and  £500,  and  £100  if  between  £500  and  £600.  An  additional  relief 
of  £25  is  granted  for  each  child,  provided  the  income  of  the  recipient  does 
not  exceed  £700.     The  rates  are  as  follows: 

1.  Earned  incomes,  2s.  3d.  per  £  (11.25%),  where  the  total  earned  and  unearned 

income  does  not  exceed  £500; 

2s.  6d.  (e.  g.  12.5%)  where  it  is  between  £500  and  £1000 
3s.  (e.  g.  15%)  «  «  «  «  £1000  "  £1500 
3s.  8d.  (e.  g.  18.33%)  "  "  "  "  £1500  "  £2000 
4s.  4d.  (e.  g.  21.66%)  "  "  "  "  £2000  "  £2500 
5s.         (e.  g.  25%)         "       "  "    above  £2500 

2.  Unearned  incomes,  3s.  per  £   where  the   total  earned   and   unearned   income 

does  not  exceed  £300  (e.  g.  15%); 

3s.  6d.  (e.  g.  17.5%)  where  it  is  between  £300  and  £500 
4s.         (e  g.  20%)  "       "  "         "        £500    "     £1000 

4s.  6d.  (e.  g.  22.5%)  "  "  "  "  £1000  "  £2000 
5s.         (e.  g.  25%)  "       "  "     above  £2000 

An  additional  duty  of  2s.  per  £  (e.  g.  10%)  is  levied  in  respect  to  income 
from  securities  that  are  desired  by  the  Chancellor,  for  credit  purposes. 

3.  Super-tax:     Where  the  total  income   exceeds  £3000,  the  super-tax  is  levied: 

on  the  excess  over  £2500,  the  rate  is  lOd.  per  pound  for  the  first  £500  of 
excess  (e.  g.  4.16%). 


1  Cf.  6  &  7  Geo.  V,  ch.  24;      6  Geo.  5,  ch.  11  and  5  &  6  Geo.  V,  ch.  89. 

113 


is  between  £300  and 
£500    « 
"       £1000    " 
"       £1500    " 
"       £2000    " 
above   £2500  (e. 


their 


£500  (e.  g.  6.25%) 
£1000  (e.  g.  8.25%) 
£1500  (e.g.  11.25%) 
£2000  (e.  g.  13.75%) 
£2500  (e.  g.  16.25%) 
;.  17.5%) 


£ 
2 


Customs 

s. 
2 
6 
0 


2 
0 


2 
0 


19 
0 


d. 
0 

0 

4J^ 


0 
6 


8 
6 


Excise 

s. 


Is.  2d.  per  pound  on  sums  between  £3000  and   £4000  (e.  g.  5.83%) 

Is.  6d.     "         "       "  •  "         £4000     "     £5000  (e.  g.  7.5%) 

ls.lOd.    «         «       «  «  «         £5000     "     £6000  (e.  g.  9.16%) 

2s.  2d.    "         «       "  •  "         £6000     «     £7000  (e.  g.  10.83%) 

2s.  6d.     "         "       "  "  "         £7000     "     £8000  (e.  g.  12.5%) 

2s.  lOd.  "         «       «  «  «         £8000     "     £9000  (e.g.  14.16%) 

3s.  2d.     "         "       "  "  "         £9000     "  £10,000  (e.  g.  15.83%) 

3s.  6d.    "         "       "  "  "      £10,000     "  £11,000  (e.  g.  17.5%) 

Soldiers  may  claim  a  reduction  of  their  income  tax  in  respect  to 
pay  as  follows : 

9d.  per  pound  if  the  total  income  does  not  exceed  £300  (e.  g.  3.73%) 
Is.  3d.     "           "        u      a      a  u  .      -  - 

Is.  9d.  "  «  «  «  « 
2s.  3d.  "  «  «  "  « 
2s.  9d.     "  u        a      u      u 

3s.  3d.  "  "  «  «  « 
3s.  6d.    "         «       «     «     « 

B.  Excise  and  Customs  Duties : 

1.  Cocoa cwt. 

husks  and  shells cwt. 

butter lb. 

2.  Coffee 

kiln    dried,    roasted   or 

ground cwt. 

otherwise lb. 

substitute lb. 

3.  Chicory 

raw  or  kiln  dried cwt. 

roasted  or  ground lb. 

4.  Sugar 

when  tested  by  polari- 
scope  and  found  to  have 

a  polarization  of  98°  cwt. 
not  exceeding. . .  76° 

Between  76°  and  77° 

((    77°  "  78° 

u         78°  "  79° 

"         79°  "  80° 

«    80°  "  81° 

«    81°  "  82° 

«    82°  "  83° 

«    83°  "  84° 

"    84°  "  85° 

"    85°  "  86° 

«    86°  "  87° 

u         87°  «  88° 

«      ggo   «  ggo 

«    89°  "  90° 

«    90°  "  91° 
«    91°  "92° 

u         92°  "  93° 

«    93°  "  94° 

«    94°  "  95° 

95°  "  96° 

«    9^o  "  97° 

«        970    «  QgO 


0 

18 


d. 


IH 
6 


0 

14 

0 

0 

11 

8 

0 

6 

9 

0 

5 

7 

0 

6 

11.3 

0 

5 

9.4 

0 

7 

2.0 

0 

5 

11.6 

0 

7 

4.7 

0 

6 

1.9 

0 

7 

7.3 

0 

6 

4.1 

0 

7 

10 

0 

6 

6.4 

0 

8 

0.7 

0 

6 

8.6 

0 

8 

3.4 

0 

6 

10.8 

0 

8 

6.4 

0 

7 

1.4 

0 

8 

9.5 

0 

7 

3.9 

0 

9 

0.5 

0 

7 

6.4 

0 

9 

3.5 

0 

7 

8.9 

0 

9 

6.9 

0 

7 

11.7 

0 

9 

10.2 

0 

8 

2.5 

0 

10 

2.3 

0 

8 

5.9 

0 

10 

6.3 

0 

8 

9.2 

0 

10 

10.3 

0 

9 

0.6 

0 

11 

2.4 

0 

9 

4.0 

0 

11 

6.4 

0 

9 

7.3 

0 

11 

10.4 

0 

9 

10.7 

0 

12 

2.4 

0 

10 

2 

0 

12 

6.5 

0 

10 

5.4 

0 

12 

10.5 

0 

10 

8.8 

114 


5.  Molasses 

If    containing    70%    or 
more    of    sweetening 

matter cwt.         0  8        10.5  0  7         4.5 

70%-50% "  0  6         4.5  0  5         3.5 

50%  or  less "  0  3  1.5  0  2         7.5 

6.  Glucose 

Solid *  0  8        10.5  0  8       10.5 

Liquid "  0  6         4.5  0  6         4.5 

7.  Saccharine oz.  0  4  6  0  4  6 

8.  Tea lb.  0  10 

9.  Other  customs  Duties: 

Dried  Fruits,  Currants 2s.  per  cwt. 

others 10s.  6d.  per  cwt. 

Tobacco  (a)  Unmanufactured: 

Containing  10  lbs.  or  more  of  moisture 

in  every  100  lbs.  weight  thereof 5s.  6d.  per  lb. 

Stripped 5s.  7d.     "     " 

Containing  less  than  10  lbs 6s.l.5d.  "     " 

Stripped 6s.  2d.     "      " 

(b)  Manufactured: 

Cigars 10s.  6d.     "     " 

Cavendish  or  Negro-head 8s.  6d.     "     " 

SnufT  containing  more  than   13  lbs.  of 

moisture  in  every  100  lbs.  weight .  .  .   6s.7.5d.  "     " 

SnufT  containing  less  than  13  lbs 8s.  "     " 

Cigarettes 8s.  6d.     "     " 

Other  manufactured  tobacco 7s.  "     * 

Wine Not  exceeding  30°  of  proof  spirit Is.  3d.  per  gal. 

Exceeding  30°  but  not  above  42° 3s.  "     " 

For  every  degree  above  42° 3d.     "     " 

Sparkling  wine  in  addition 2s.  6d.     "      " 

Still  wine  in  bottle Is.  per  gal.  in  addition 

Beer Not  exceeding  1215° £1  13s.  for  36  gals. 

Exceeding  1215° £1  18s.     "  " 

Others  of  1055°  specific  gravity 8s.  3d.       ""        " 

Gasoline 6d.  per  gal. 

Spirits 18s.  lOd.  per  proof  gal. 

If    imported    in    bottle,    enumerated, 

tested  or  sweetened Is.  per  proof  gal. 

Liqueurs  and  cordials £1  6s.  6d.  per  gal. 

Perfumed £1  10s.  Id.  "        " 

Additional  if  imported  in  bottle Is.  "       " 

Chloroform 4s.  4d.  per  lb. 

Chloral  Hydrate Is.  9d.  per  lb. 

Collodion £1  14s.  1  Id.  per  gal. 

Ether Acetic 2s.  7d.  per  lb. 

Butyric £1     Is.  lOd.  "    gal. 

Sulphuric £1  16s.     6d.  " 

Ethyl Bromide Is.    5d.  per  lb. 

Chloride £1     Is.  lOd.    "     gal. 

Iodide 19s.  "     " 

Playing  Cards 3s.    6d.  per  pack 

115 


Matches.  .  .  .Customs 3s.    6d.  per  10,000 

Excise 3s.    4d.    "    10,000 

(If  in  boxes  of  more  than  80  each.   Is.  9d.  and  Is.  8d.  re- 
spectively) 

Motor     Cars,     Motor     Cycles    and     parts \ 

Clocks,  Watches  and  parts Y  333^%  ad  valorem 

Musical  Instruments J 

Cinema  Films 

Negatives 8d.  per  linear  ft. 

Positives Id. 

Blank Hd.     "       "       " 

Table  Waters 

If  prepared  with  sugar,  etc 4d.  per  gal. 

Otherwise 8d.     "     " 

C.  Excess  Profits  Duty:     £200  exempt,  50%  duty  raised  to  60%.    The  standard 

is  the  average  profits  during  any  two  years  of  the  three  years  preceding 
1914.  If  no  pre-war  standard  is  possible,  seven  per  cent  of  the  capital 
employed  is  taken  as  the  base  in  the  case  of  individuals  and  six  per  cent  in 
the  case  of  corporations. 

D.  Entertainment  Admissions: 

Excise  duty  of  y^^i-  where  payment  does  not  exceed  2d. 


Id. 
2d. 
3d. 
6d. 
Is. 


f  "         is  between  2d.  and  6d. 

6s.  and  2s.  6d. 
2s.  6d.  and  5s. 
5s.  and  7s.  6d. 
7s.  6d.  and  12s.  6d. 


Is.   for  every  10s.  or  fraction  above  12s.  6d. 


III.     France 


During  the  first  year  or  two  of  the  war,  very  few 
changes,  if  any,  were  made  in  the  fiscal  system  of  France, 
which  were  equal  in  magnitude  to  those  introduced  in 
Great  Britain.  It  must  be  remembered  that  the  occupa- 
tion of  French  territory  by  the  Germans  early  in  the 
struggle  made  serious  inroads  on  the  national  revenue,  and 
were  it  not  for  the  marked  rise  in  the  yield  of  customs 
duties  occasioned  by  the  expansion  of  foreign  commerce, 
notably  with  the  United  States,  this  withdrawal  of  re- 
ceipts might  have  produced  disastrous  results.  The 
French  legislators  were  slow  in  adjusting  the  revenue  to 
the  tremendous  and  unprecedented  demands  made  upon 
the  country  as  a  result  of  the  conflict  and  the  fiscal  situa- 
tion was  far  from  encouraging. 

In  1916  and  in  the  early  part  of  the  present  year,  al- 
terations were  made  of  far-reaching  significance.  An 
income  tax  law  was  introduced  and  passed  in  1916,  with  a 

116 


proportional  rate  of  2%  on  amounts  exceeding  5,000 
francs,  coupled  with  a  system  of  abatements  which  ren- 
dered the  tax  progressive.  However,  the  rates  were 
changed  later,  as  will  be  indicated  in  greater  detail  in  the 
latter  part  of  this  section.  An  excess  profits  duty  was 
levied,  and  a  war  tax  was  imposed  upon  those  who  were 
exempt  from  military  service.  Many  of  the  taxes  falling 
under  the  category  "assimilated  taxes"  were  doubled,  the 
impost  on  the  income  from  personalty  was  advanced  con- 
siderably, new  excise  duties  were  imposed  and  the  tele- 
phone, telegraph  and  postal  charges  were  all  revised  to 
yield  a  larger  income  than  hitherto. 

A  glance  at  the  table  here  presented  will  indicate  the 
revenue  situation  of  France  from  1913  through  1916.  It 
is  observed  that  the  only  sources  that  have  responded  to 
the  increased  needs  occasioned  by  the  war  are  the  import 
duties  and  the  tax  on  the  income  from  personalty.  All  the 
other  items  have  suffered  a  reduction  during  the  war.  In 
the  non-tax  revenue  group,  the  income  from  public  do- 
main has  displayed  a  tendency  to  increase  beyond  its 
normal  yield. 


Revenue  of  France  1913,  1914, 

1915  and  1916. ' 

1913 

1914 

1915 

1916 

A.  Tax  Revenues: 

Francs 

Francs 

Francs 

Francs 

Direct  Tax 

562,815,768 

574,429,449 

548,929,516 

492,015,839 

Assimilated  Taxes 

59,518,262 

61,501,987 

64,877,570 

48,703,402 

Registration 

833,667,000 

615,011,000 

463,594,500 

524,617,000 

Stamps 

239,631,500 

195,952,000 

146,167,500 

157,638,000 

Bourse  Operations 

9,842,500 

5,718,500 

1,312,000 

2,342,000 

Income  from  Per- 

sonalty   

138,049,000 

153,340,000 

157,782,000 

181,432,500 

Import  Duties. . . . 

754,382,000 

577,613,000 

764,144,000 

1,399,421,000 

Indirect  Taxes.  .. 

673,928,000 

562,108,000 

477,069,000 

472,902,000 

Tax  on  Mineral  Oil 

1,983,000 

1,455,000 

227,000 

462,000 

Tax  on  Salt 

35,239,000 

33,717,000 

31,854,000 

30,954,000 

Tax  on  Sugar .... 

179,591,000 

148,191,000 

204,763,000 

173,097,000 

Total 

3,488,647,030 

2,929,036,936 

2,860,720,086 

3,483,584,741 

B.  Non-Tax  Rev- 

enue: 

Monopolies 

1,015,777,000 

931,061,400 

837,570,300 

942,643,400 

Domain,  etc 

135,133,500 

124,008,600 

185,681,100 

240,204,100 

1,150,910,500 

1,055,070,000 

1,023,251,400 

1,182,847,500 

1  These  figures  are  all  taken  from  the  Journal  Officiel  de  la    Ripublique 
Franfaise.     1  franc  =$0.19295  at  fixed  rate  of  exchange. 


117 


The  monthly  expenditure  has  grown  from  1,340  mil- 
lion francs  in  1914  to  3,191  million  francs  in  1917.^  The 
following  figures  indicate  the  authorized  expenditure  up  to 
June  30,  1917. 

Five  months  of  1914 8,898,583,901  francs 

Fiscal  year  1915 22,804,486,525       " 

Fiscal  year  1916 32,635,943,250       " 

First  six  months  of  1917 18,570,959,650       " 


Total 82,909,973,326 


u 


It  has  been  estimated  by  the  French  Minister  of 
Finance,  M.  Ribot,  that  the  receipts  from  taxation  will 
amount  to  12,144,639,000  francs  from  August  1,  1914  to 
June  30,  1917.  Assuming  these  figures  to  be  approxi- 
mately correct,  it  is  found  that  the  French  people  are 
meeting  only  14.6%  of  the  authorized  expenditure  out  of 
taxation.  The  remainder  of  the  bill  is  covered  by  advan- 
ces from  the  Bank  of  France,  loans,  etc. 

When  a  comparison  is  made  between  Great  Britain 
and  France  with  respect  to  the  emphasis  placed  on  direct 
taxation,  an  interesting  conclusion  stands  forth.  It  is 
discovered  that  the  former  is  now  obtaining  73%  of  its 
resources  from  direct  taxation  as  compared  with  47%  in 
1913.  France,  on  the  other  hand,  is  securing  39%  of  its 
present  revenue  from  direct  sources,  as  compared  with 
47%  in  1913.  Both  France  and  England  relied  almost 
equally  on  direct  taxation  before  the  war,  but  since  then  a 
gap  has  appeared  and  the  two  countries  are  now  proceed- 
ing to  opposite  extremes.  The  customs  duties  have 
doubled  in  France  in  the  fiscal  year  1916,  which  aided  to 
swell  the  total  of  indirect  taxes.  In  England  the  income 
tax  has  displayed  a  truly  remarkable  and  almost  incredible 
development,  and  combined  with  the  enormous  yield  of 
the  excess  profits  duty,  it  has  very  largely  contributed  to 
the  prominence  of  direct  taxation.  The  following  table 
indicates  the  results  in  detail: 

1  Annalist,  March  12,  1917,  p.  367. 

118 


Direct  and   Indirect   Taxation   Compared   in  Great  Britain 

and  France. 


A.     FRANCE  (Francs) 


1913 

1914 

1915 

1916 

Direct  Taxes: 

Contribution    Di- 
rect   

Assimilated  Taxes 

Donations  &  Suc- 
cessions   

Income  from  Per- 
sonalty   

562,815,768 
59,518,262 

357,010,000 

138,049,000 

574,429,449 
61,501,987 

248,899,500 

153,340,000 

548,929,156 
64,877,570 

243,828,500 

157,782,000 

492,015,839 
48,703,402 

263,860,000 

181,432,500 

Total  Direct . .  . 

Indirect  Taxes.  .  . 
Direct     Taxes     as 
Percentage    of 
Total 

1,117,393,030 
2,371,254,000 

47.1% 

52.9% 

1,038,170,936 
1,890,866,000 

54.9% 

45.1% 

1,015,417,226 
1,845,302,860 

55.0% 

45.0% 

986,011,741 
2,497,573,000 

39.4% 

Indirect   Taxes   as 
Percentage  of 
Total 

60.6% 

B.     GREAT  BRITAIN   (Pounds) 


1913 

1914 

1915 

1916 

Direct  Taxes: 

Estate  Duties. . .  . 

Land   and   House 
Tax 

Income  Tax 

Land  Value  Duty.. . 
Excess  Profits  Duty. 

27,165,122 

2,684,406 

47,240,770 

734,892 

28,542,570 

2,548,067 

69,544,854 

413,961 

30,937,982 

2,654,865 

129,160,589 

368,816 

31,232,000 

2,580,000 
205,033,000 

139,920,000 

Total  Direct. 
Indirect  Taxes: 

Customs 

Excise 

77,825,190 

35,568,580 

39,657,957 

9,983,363 

101,049,452 

39,150,492 

42,419,167 

7,434,792 

163,122,252 

59,575,610 

61,207,683 

6,779,998 

378,765,000 

70,561,000 
56,380,000 

Stamps 

7,878,000 

Total  Indirect.. 

Direct     Taxes    as 

Percentage       of 

Total 

85,209,900 

47.7% 
52.3% 

89,004,451 

53.1% 
46.9% 

127,563,291 
56.1% 
43.9% 

134,819,000 

73.7% 

Indirect  Taxes  as 
Percentage       of 
Total 

26.3% 

The  recent  changes  that   have  been   made  in   the 
French  tax  systems  follow. 


119 


(a)  Income  Tax :    i  Sum  of  3,000  francs  is  exempt.     On  3,000-8,000 

francs,  the  rate  is  1%;  8,000-10,000  fr.  2%;  3%  on  12,000- 
16,000  fr.;  4%  on  16,000-20,000  fr.;  5%  on  20,000-40,000  fr.; 
6%on40,000-60,000fr.;  7%on  60,000-80,000  fr.;  8%  on  80,000- 
100,000  fr.;  9%  on  100,000-150,000  fr.  and  10%  on  the  surplus. 
Reduction  of  5%  of  the  principal  of  the  tax  is  allowed  when  the 
recipienthasone  dependent;  10%  if  two;  20%  if  three  and  10% 
for  each  additional  one. 

(b)  War  Tax:     Tax  of  12  francs  and  increase  of  25%  of  income  tax 

payable,  levied  on  (1)  those  declared  unfit  or  retired  from 
service  before  August  1,  1914;  (2)  those  in  auxiliary  service,  etc. 

(c)  Grouped  Taxes:     The  taxes  on  mining  royalties,  carriages, 

horses,  mules,  billiard  tables,  clubs,  associations,  meeting 
places  and  game  keepers  are  all  doubled.  In  the  case  of  con- 
cessions not  worked  for  ten  years,  the  tax  is  raised  to  5  fr.  per 
hectare. 

(d)  War  Profits:     60%  of  the  profits  realized  by  the  war  above 

500,000  fr.  as  of  January  1,  1916.  Otherwise  the  old  rate  of 
50%  remains  in  force.  The  average  profits  during  the  three 
years  prior  to  August  1914  are  taken  as  the  basis  for  measuring 
the  extraordinary  profits  as  a  result  of  the  war. 

(e)  Sale  of  Ships:     A  tax  of  50  centimes  per  100  francs  is  charged 

on  the  price  of  sale  or  charter  of  vessels  of  above  100  tons. 

(f)  Securities:     Tax  of  5%  on  income  of  securities  and  of  10%  on 

prices  paid  in  connection  with  state,  municipal  and  other 
bonds.  Tax  of  6%  on  certain  classes  of  foreign  securities  and 
foreign  government  loans.  Fees  due  to  directors  are  all 
taxed  5%. 

(g)  Theatres:     Tax  of  10  centimes  on  seats  costing  1  fr.  or  less; 

25  centimes  on  1.05  fr.-8  fr.  and  50  centimes  on  seats  above 
8  francs  in  value.  Seats  in  state  theatres  are  untaxed  below 
5  francs  and  in  municipal  theatres,  3  fr. 

Music  Halls:  20  centimes  on  seats  up  to  1^2  ^r.;  40c.  on  1.55- 
4  fr. ;  60c.  on  4.05-8  fr.  and  1  fr.  if  above  8  fr. 

Cinematographs:  Tax  on  gross  monthly  receipts  of  5%  up  to 
25,000  fr.;  10%  on  25,000-50,000  fr.;  20%  on  50,000- 
100,000  fr.  and  25%  on  100,000  fr.  and  above. 

(h)  Alcoholic  Drinks: 

50c.  per  hectolitre  on  right  to  manufacture  beer 

13/2fr.  "  "         "         "     "   move  cider,  perry  and  mead 

3fr.       "  "         "         "     "        "      ordinary  wine  and  10  fr. 

^Journal  Officiel  de  la  Republique  Franfaise,  December  31,   1916. 

120 


per  100  kilograms  of  dried  grapes  used  in  manufacturing  wine 
for  home  consumption. 

(i)  Mineral  Waters:  (a)  If  the  factory  price  is  less  than  20  cen- 
times per  bottle  of  Yi  litre  the  tax  is  1  centime;  per  bottle  of 
more  than  Yi  litre,  2  centimes; 

(b)  If  the  price  is  more  than  20  centimes  per  bottle  of 
3/^  litre,  the  tax  is  3  centimes;  otherwise,  6  centimes.  Prepara- 
tions for  the  manufacture  of  mineral  waters  are  taxed  at  2 
centimes  on  the  amount  needed  to  produce  a  litre  of  water. 

(j)  Pharmaceutical  Products:  A  tax  on  retail  selling  price: 
5c.  on  products  selling  at  less  than  50c.;  10c.  on  50c.  to  10  fr. 
and  50c.  for  every  5  fr.  or  fraction  thereafter.  Only  those 
products  are  taxable  to  which  a  special  name  is  given,  or  for 
which  priority  of  invention  is  claimed  or  which  are  advertised 
without  publication  of  the  chemical  formula.  Ordinary  drugs 
prepared  and  sold  by  chemists  are  excluded. 

(k)  Colonial  Products: 

CofTee  and  chicory  root,                         30  fr.  per  100  kilograms 

Cocoa,  husks  or  shells,                           20  fr.  " 

Chocolate  with  over  55%  cocoa,         26  fr.  "  "           " 

Chocolate  with  55%  cocoa  or  under,  14  fr.  "  "           " 

Pepper,  all-spice  and  imitations,       104  fr.  "  "           " 

Amomum,  cardamom,  cinnamon,etc.40  fr.  per  100  kilograms 

Nutmegs  without  husks,  and  mace    60  fr.  "  "           " 

Vanilla    .                                                 80  fr.  "  " 

Tea                                                           40  fr.  "  « 

Sugar,  refined  and  raw                          40  fr  "  "           " 

candies                                 42  fr.  80c.  «  " 

molasses                                        2  fr.  "  " 

glucoses                                         9fr.  «  " 

Tobacco,  small  packets  to  consumers  15  fr.  "  "           " 

retail                                     14  fr.35c.  "  " 

(1)  Postal  Taxes: 

(a)  postal  rates  advanced. 

(b)  telegraph  messages:  from  15c.  on  telegrams  not  exceeding 
10  words  to  50c.  on  above  50  words,  etc.  Additional  tax  on 
express  letters,  private  lines,  wires  rented  or  conceded  to  the 
press,  etc. 

(c)  telephone:  (a)  local  calls  5  centimes. 

(b)  trunk  calls,  from  5c.  on  25c.  message  to  50c. 
on  2  fr.  message. 

(d)  money  orders:  5  centimes  on  money  orders  up  to  20  fr. 

10  "         "         "  "       "     "  20-500  fr. 

20         "         "         "  "     above  500  fr. 

121 


IV.    Other  Coantries 

A.  Germany.  Germany's  method  of  financing  the 
war  stands  in  contradistinction  to  that  of  Great  Britain. 
The  view  that  the  enormous  expenditures  occasioned  by 
war  should  be  partly  defrayed  out  of  taxation  has  found  no 
strong  place  among  the  fiscal  policies  of  German  statesmen. 
One  explanation  of  this  phenomenon  is  the  lack  of  elasticity 
in  the  revenues  of  the  Imperial  Government.  The  central 
authorities  had  always  reserved  for  themselves  the  field  of 
indirect  taxation;  the  individual  states,  on  the  other 
hand,  had  relied  considerably  and  often  mainly  on  direct 
taxation.  Consequently,  with  the  rise  in  the  expenditures 
of  the  latter,  the  burden  of  taxation  became  much  heavier 
than  in  peace  times  and  it  became  impossible  even  to  con- 
template raising  revenue  for  Imperial  purposes  by  direct 
means. 

Furthermore,  it  was  the  intention  of  the  military  au- 
thorities of  the  Central  Powers,  at  the  outbreak  of  the  war, 
to  attack  France  and  crush  her  completely  before  Great 
Britain  could  mobilize  its  resources  and  come  to  the  aid  of 
France  and  then  to  proceed  similarly  in  the  case  of  Russia. 
By  such  a  speedy  and  decisive  victory,  it  was  held  that 
Germany  could  easily  impose  an  indemnity  to  cover  its 
sacrifices  and  so  free  its  own  people  of  any  possible  war 
burdens.  As  it  happened,  matters  turned  out  differently, 
but  the  hope  of  an  indemnity  was  never  given  up.  Al- 
though at  times  it  seemed  to  languish,  the  Imperial  Min- 
ister of  Finance,  Dr.  Karl  Helfferich,  made  an  open  secret 
of  this  fact  and  continually  referred  to  it  as  a  foregone 
conclusion.  From  a  glance  at  the  present  military  situa- 
tion, however,  it  seems  that  this  illusion  will  have  to  be 
dispelled  and  that  the  German  financiers  will  soon  have  to 
face  the  cold  fact  that  Germany  is  now  waging  a  war 
almost  entirely  on  credit,  to  the  detriment  of  future 
generations. 

Data  are  completely  lacking  as  to  the  actual  receipts 
and  expenditures  from  1914  to  1917.  No  effort  was  spared 
to  find  these  figures,  but  with  little  or  no  success.     The 

122 


table  here  appended  gives  the  receipts  as  contained  in  the 
Imperial  budget  for  the  years  1913,  1914  and  1915: 

Revenues  of  Germany  in  1913,  1914  and  1915  ^  (in  marks) 


Source 


1.  Post  and  Telegraph 

2.  Printing-office 

3.  Railroads 

4.  Various  Administrative  Receipts 

5.  Taxation: 

Customs 

Tobacco 

Cigarettes 

Sugar  

Salt 

Spirits 

Vinegar 

Wine 

Lamps  and  Bulbs 

Matches 

Beer 

Cards 

Stamp  Tax  on  Bills 

Stamps  (general) 

Increment  Tax 

Inheritance 

Miscellaneous 

6.  Contributions  for  Defence 

7.  Contributions  from  the  States  .  . 

8.  Miscellaneous 

Total 


1913 


833,314,600 
15,742,800 

158,580,200 
91,565,600 

679,321,800 

11,415,000 

42,699,300 

173,745,700 

62,386,300 

193,774,700 

799,100 

9,511,300 

15,072,100 

20,130,700 

130,005,300 

2,003,800 

19,615,500 

235,034,500 

15,322,900 

46,356,800 

2,084,700 

820,600 

51,940,800 

383,155,300 


3,194,399,400 


1914 


881,286,500 
13,885,000 

162,246,000 
81,961,000 

712,930,000 

10,876,000 

39,202,000 

163,252,000 

61,144,000 

193,995,000 

825,000 

9,970,000 

15,866,000 

21,035,000 

128,950,000 

2,033,000 

19,100,000 

250,085,000 

100,000 

50,000,000 

1,919,000 

393,820,900 

51,940,800 

138,755,300 


3,405,178,400 


1915 


881,569,500 
13,885,000 

162,246,000 
79,822,700 

712,930,000 

10,876,000 

39,202,000 

163,252,000 

61,144,000 

193,995,000 

825,000 

9,970,000 

15,866,000 

21,035,000 

128,950,000 

2,033,000 

19,100,000 

264,085,000 

100,000 

50,000,000 

1,919,000 

327,740,900 

51,940,800 

104,593,600 


3,323,081.400 


B.  Canada.  Canada  has  recently  added  new  war 
taxes  to  meet  the  expenditures  arising  as  a  result  of  her 
participation  in  the  struggle  of  the  Empire.  The  total  re- 
ceipts in  1916  were  $172,147,838.27,  distributed  as  follows: 

Receipts  of  Canada,  1916^ 

Customs $98,649,409.48 

Excise 22,428,491.58 

Post  Office 18,858,690.10 

1  Statistisches  Jahrbuch  fiir  das  Deutsche  Reich,  1915,  pp.  347-348.  The 
figures  for  1914  and  1915  are  budgetary  estimates.  xAlthough  the  publication 
came  out  in  1915  when  the  receipts  for  1914  could  have  already  been  ascertained, 
the  actual  revenue  is  not  given,  perhaps  to  conceal  the  true  situation  at  the  time. 

2  Canadian  Year  Book,  1917. 


123 


Revenue  from  Public  Works 352,918.79 

Revenue  from  Minor  Public  Works  58,868.50 

Revenue  from  Railways 18,427,908.65 

Revenue  from  Canals 446,722.21 

Interest  on  Investments 3,358,210.13 

Patent  Fees 230,191.95 

Casual 1,328,124.09 

Dominion  Lands 2,299,550.47 

Inspection   of  Staples  Revenue.  .  913,616.46 

War  Tax  Revenue 3,620,781.72 

Miscellaneous 1,174,354.14 

The  expenditures  for  1916  were  $130,350,726.90,  leaving  a 
net  surplus  of  $41,797,111.37. 

Since  1881,  the  total  debt  of  Canada  has  risen  almost 
four-fold  and  the  net  debt  three-fold.  The  following  table 
indicates  the  debt  and  interest  for  various  years: 


Debt  and  Interest  on  Debt 


1881 
1885 
1890 
1895 
1900 
1905 
1910 
1913 
1914 
1915 
1916 


Total  Debt 


$199,861, 
264,703, 
286,112, 
318,048, 
346,206, 
377,678, 
470,663, 
483,232, 
544,391 
700,473, 
943,839, 


537.51 
607.43 
295.10 
754.87 
979.92 
579.80 
045.99 
555.24 
368.86 
814.37 
433.92 


Net  Debt 


$155,395,780.40 
196,407,692.14 
237,533,211.77 
253,074,927.09 
265,493,806.89 
266,224,166.63 
336,268,546.33 
314,301,625.68 
335,996,850.14 
449,376,083.21 
615,156,171.02 


Interest  Paid 
on  Debt 


$7,591,144.88 
9,419,482.19 
9,656,841.16 
10,466,294.44 
10,699,645.20 
10,630,115.05 
13,098,160.61 
12,605,882.48 
12,893,504.95 
15,736,742.94 
21,421,584.86 


Rate  of 
Interest  on 
Gross  Debt 


3.79 
3.55 
3.37 
3.29 
3.09 
2.81 
2.78 
2.61 
2.37 
2.24 


The  following  excise  duties  and  war  taxes  are  now  in 
force : 

A.  Excise  Duties. 

Acetic  Acid 4c.  per  gal. 

Malt '.  .  .  .3c.  per  lb. 

Imported 5c.  per  lb. 

Malt  Liquor 15c.  per  gal. 

Spirits..  .  .When  the  material  used  in  the  manufac- 
ture consists  of  not  less  than  90%  of 
unmalted  grain  or  when  manufactured 
from  sugar,  molasses,  etc $2.40  per  proof  gal. 


124 


When  manufactured    from    malt    barley 

exclusively $2.42  per  proof  gal. 

When  manufactured  from  molasses  ex- 
clusively  $2.43  per  proof  gal. 

When  used  in  manufacture  of  perfumery. 75c.  per  gal. 

When  used  in  manufacture  of  soaps 15c.  per  gal. 

Fusel  Oils 15c.  per  standard  gal. 

Vinegar 4c.  per  gal. 

Tobacco . . 

Cigarettes 

Not  more  than  3  lbs.  per  1000 $3  per  1000 

More  than  3  lbs.  per  1000 $8  per  1000 

Cigars $3  per  1000 

In  pkgs.  of  less  than  10  cigars $4  per  1000 

Snuff 10c.  per  lb. 

Smoking,  Chewing,  Plug  Twist,  etc 10c.  per  lb. 

Common  Canadian  Twist  made  from  to- 
bacco grown  in  Canada 10c.  per  lb. 

All  Foreign  Leaf,  unstemmed 28c.  per  lb. 

All  Foreign  Leaf,  stemmed 42c.  per  lb. 

All  manufactures  where  less  than  50%  of 
Canadian  raw  tobacco  is  used  and  10% 
or  more  of  other  material 16c.  per  lb. 

Wines.  .  .  .Grape  (non-sparkling),  3c.  per  pint,  5c.  per  quart,  etc. 

Champagne  and  sparkling,  13c.  per  half  pint,  25c.  per  pint. 

B.  War  Taxes. 

Bank  Note  Circulation,  34  of  1%  on  average  amounts  in  circulation  during 
the  last  days  of  December,  March,  June  and  September. 

Trust  and  Loan  Companies,  1%  on  gross  amount  of  interest  from  loans  and 
investments  in  Canada  and  from  other  business. 

Insurance  Companies,  1%  of  net  premiums  after  January  1,  1915  (life, 
marine  and  fraternal  exempt). 

Telegrams Ic.  each 

Railroad  and  Steamship  Tickets 

(a)  5c.  on  tickets  costing  $1  to  $5  and  5c.  for  every  $5  above  or  fraction 
thereof,  if  the  destination  is  Canada,  Newfoundland,  West  Indies, 
Bermudas,  British  Guiana,  Honduras  and  the  United  States. 

(b)  Otherwise,  the  tax  is  $1,  if  ticket  costs  more  than  $10;  $3,  if  above 
$40  and  $5,  if  above  $65. 

Sleeping  Cars,  5c.  for  each  seat  and  10c.  for  each  berth. 
Promissory  Notes,  Bills  of  Exchange,  Checks,  etc..  .2c. 

Letters,  Post  Cards Ic. 

Perfumery  and  Patent  Medicine,    Ic.    for    every    25c.    of    purchase    price. 

War  Profits,  25%  of  excess  above  7%  of  the  capital  engaged,  if  corporation, 
and  above  10%  otherwise.  ($50,000  business  exempt;  also  life  insurance 
companies  and  farming  industry). 

C.  Russia.  The  abolition  of  the  vodka  monopoly 
soon  after  the  opening  of  hostiHties  left  Russia  in  a  sad 
fiscal  plight.  In  1913,  the  receipts  from  this  source  were 
899,299,000  roubles;^  in  1914,  503,904,000  roubles,  and  ac- 

1  1  rouble — $0.51456  at  fixed  rate  of  exchange. 

125 


cording  to  the  revised  estimates  for  1915  and  1916,  they 
were  114,260,000  and  49,860,000  roubles  respectively,  or  a 
reduction  of  94%  in  the  revenue. 

In  the  table  of  "Receipts  of  Russia"  printed  on  this 
and  the  following  pages  the  totals  here  cited  with  regard 
to  VODKA  receipts  do  not  appear  in  detail  as  they  are 
divided  up  under  several  heads  in  the  government  state- 
ment, such  as  "liquor,"  "spirit  monopoly." 

The  following  table  shows  clearly  the  financial  situa- 
tion, as  judged  from  the  revised  estimates  for  1916  and 
1915  in  comparison  with  the  actual  receipts  in  1914  and 
1913: 

Receipts  of  Russia  ^   (in  roubles) 


Revised  Estimate  for 

Actual 

Receipts 

1914 

Actual 

1916 

1915 

Keceiptt 
1913 

A.  Direct  Taxes: 

Land,   Real   Estate  and 
Personal 

On   Commerce   and    In- 
dustries   

118,953,876 

192,660,500 

48,060,000 

116,364,770 

210,499,500 

47,701,000 

Interest  Payable  on   Se- 
curities   

Total 

B.  Indirect  Taxes: 

Liquor 

359,674,376 

25,261,000 

149,594,000 

8,063,000 

190,853,000 

82,040,200 

43,517,700 

314.400,000 

374,565,270 

60,418,000 
111,706,500 

10,854,000 
177,600,000 

62,040,200 

43,515,500 
233,050,100 

280,557,000 

272,517,000 

Tobacco 

ExciseonCigarettePapers 
Sucar 



Petroleum 

Matches 

Customs 

Total 

813,728,900 

128,209,400 

32,190,000 

6,000,000 

240,000,000 
10,000,000 
27,202,200 

699,184,300 

138,039,295 

53,215,000 

8,000,000 

286,000,000 
10,000,000 
18,659,237 

708,101,000 

661,453  000 

C.  Duties: 

Stamps 

Transfers  of  Property. .  . 
Harbor  Dues 

Transportation       Duties 
(passengers  and  goods). 

Fire  Insurance 

Miscellaneous 

Total 

443,601,600 

513,913,532 

209, 105,000 

231,230,000 

1  Russian  Year  Book,  1916,  pp.  590,  et  seq. 

126 


Receipts  of  Russia  (in  roubles) — Continued 


Revised  Estimate  for 

Actual 

Receipts 

1914 

Actual 

Receipts 

1913 

1916 

1915 

D.  Royalties        

398,000 
34,637,800 
94,680,000 
70,600,000 
51,360,000 

374,000 
16,758,050 

109,050,000 
55,730,000 

144,260,000 

Mines      

Mint 

Postal  Revenue 

Telegraph  and  Telephone 
Spirit  Monopoly 

Total 

E.  Property  and  Funds 
Belonging  to  the  State 

Rents 

251,675,800 

41,628,587 

95,890,500 
728,682,000 

25,641,429 
124,279,800 

14,708,000 

326,172,050 

44,320,773 
85,748,900 
848,578,650 
25,824,814 
39,890,800 
26,474,000 

646,901,000 

1,024,883,000 

Forests 

State  Railways 

State  Works  and  Mills. . 
Interest  on  Funds,  etc  .  . 
Share  in  Profits  of  R.  R. 

Total 

F.  Expropriation  of  State 
Property 

1,030,830,316 
1,273,869 
1,563,586 

112,552,414 

17,248,457 

3,032,149,318 

614,435,259 

1,070,837,937 
1,826,790 
1,864,863 

128,697,152 

15,112,420 

3,132,174,314 

70,318,878 

964,520,000 
1,074,000 
1,931,000 

107,502,000 

25,055,000 
2,898,098,000 

1,043,741,000 
2,857,000 

G.      Payments    in     Re- 
demption of  Land .... 

H.    Reimbursements    of 
Treasury 

1,194,000 
116,677,000 

I.  Miscellaneous 

Total  Ordinary  Revenue 
Total  Extraordinary    " 

16,160,000 
3,417,360,000 

Grand  Total . . . 
Ordinary  Expenditure  .  . 

3,646,584,577 
3,174,124,000 

3,202,493,192 
3,068,055,000 

2,898,098,000 
2,927,099,000 

3,417,360,000 
3,094,248,000 

During  1915  and  1916  two  important  fiscal  measures 
were  introduced,  viz.,  an  excess  profits  duty  and  a  general 
income  tax.  The  former  went  into  effect  January  1,  1916 
and  affected  all  companies  and  profit-making  concerns. 
In  addition  to  the  ordinary  industrial  tax,^  the  excess 
profits  duty  is  levied  on  all  profits  in  excess  of  8%  of  the 
capital  employed  in  the  business  and  in  excess  of  the  aver- 
age profits  in  1913  and  1914.     This  law  applies  to  profit- 

1  The  industrial  tax  ranges  from  5%  on  profits  exceeding  3%  of  the  capital 
employed  to  \l}^i%  on  profits  amounting  to  20%  of  the  capital.  Salaries  of 
members  of  the  Board,  general  managers,  their  assistants  and  attorneys  are  taxed 
1%,  if  between  3000  and  5000  roubles;  2%,  if  5000-10,000;  4%,  if  10,000-15,000; 
5%,  if  15,000-20,000  and  6%,  if  above  20,000  roubles. 


127 


making  concerns  that  are  not  subject  to  the  ordinary  in- 
dustrial tax  (provided  the  excess  is  500  roubles)  and  to  the 
salaries  and  remunerations  of  directors,  members  of  the 
council  of  the  committee  of  auditors,  managers,  assistant 
managers  and  attorneys  of  limited  liability  companies, 
(provided  the  increase  above  1913  and  1914  is  in  500 
roubles  or  more).  For  the  latter  category,  the  rate  is  20% 
on  the  increase.  In  all  other  cases,  the  rates  are  progres- 
sive in  the  following  manner: 

If  the  profits  on  the  capital  are  between  8%  and  9%,  the  tax  is  20%  of  the  inc. 


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I              il 

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(I 

n 

15%  " 

16%, 

it 

it 

ti 

30%  " 

it 

u 

U         1 

i               u 

u 

u 

(( 

(( 

u 

16%  " 

17%, 

ti 

« 

a 

32%  « 

i< 

It 

u        t 

i              u 

« 

a 

(( 

(( 

il 

17%  " 

18%, 

it 

It 

ti 

34%  " 

u 

11 

U          I 

(            (1 

» 

u 

u 

u 

it 

18%  " 

19%, 

ti 

ti 

it 

36%  " 

u 

u 

U          1 

(              ti 

a 

a 

a 

a 

It 

19%  « 

20%, 

ti 

a 

it 

38%  " 

ti 

a 

and  if  the  profits  amount  to  more  than  20%  of  the  capital,  the  tax  is  40%. 

The  income  tax  is  general  in  its  character,  applying  to 
all  profits,  gains  and  incomes  exceeding  850  roubles. 
Limited  liability  companies  are  permitted  to  deduct,  in 
addition  to  all  other  provisions  concerning  deductions,  an 
amount  equivalent  to  3%  of  their  capital.  The  rates  of 
the  income  tax  run  thus: 


On 

incomes  of    10,000  roubles, 

the  tax  is       300  roubles  (e.  g.  3%) 

(1 

» 

"     15,000       " 

a       ti       ti           6QQ 

li 

(e.  g.  4%) 

u 

it 

"    20,000       " 

"     "     "       1000 

a 

(e.  g.  5%) 

a 

ti 

"    30,000       " 

"     "     "      1650 

u 

(e.  g.  5.5%) 

u 

It 

"    50,000       " 

"     "     "      3250 

u 

(e.  g.  6.5%) 

a 

u 

"  100,000       " 

"     "     "      8000 

u 

(e.  g.  8.0%) 

a 

u 

"  200,000        " 

"     "     "  20,000 

a 

(e.  g.  10.0%) 

a 

(( 

"  300,000        " 

"     "     "  33,000 

a 

(e.g.  11%) 

a 

ti 

"  400,000       " 

"     "     "  48,000 

a 

(e.  g.  12%) 

u 

ti 

exceeding  40,000  roubles,  the  tax  is  ' 

18,000  roubles  plus  1 

roubles  on  each  10,000  roubles  exceeding  400,000  roubles. 


D.  Other  Belligerents.  It  has  been  impossible  to 
present  any  reliable  data  concerning  Italy,  Austria,  Tur- 
key, etc.,  although  no  efforts  were  spared  in  this  direc- 
tion. Material  is  exceedingly  scant  and  too  old  to  be  of 
any  use  at  the  present  moment. 


128 


PART   V. 


War  Finance  Act 


I 


War  Finance  Act 


House  of  Representatives,  65th  Congress,  1st  Session  Com- 
plete text  of  the  Bond  Issue  Bill  introduced  by  Representatiye 
Eitchin.  Approved  by  President  Wilson,  April  24,  1917.  H.  R. 
2762. 

AN  ACT 

To  authorize  an  issue  of  bonds  to  meet  expenditures  for 
the  national  security  and  defense,  and  for  the  purpose 
of  assisting  in  the  prosecution  of  the  war,  to  extend 
credit  to  foreign  governments,  and  for  other  purposes. 

Be  it  enacted  by  the  Senate  and  House  of  Representatives 
of  the  United  States  of  America  in  Congress  assembled,  That 
the  Secretary  of  the  Treasury,  with  the  approval  of  the 
President,  is  hereby  authorized  to  borrow,  from  time  to 
time,  on  the  credit  of  the  United  States  for  the  purposes  of 
this  Act,  and  to  meet  expenditures  authorized  for  the 
national  security  and  defense  and  other  public  pur- 
poses authorized  by  law  not  exceeding  in  the  aggregate 
$5,000,000,000,  exclusive  of  the  sums  authorized  by  section 
four  of  this  Act,  and  to  issue  therefor  bonds  of  the 
United  States. 

The  bonds  herein  authorized  shall  be  in  such  form  and 
subject  to  such  terms  and  conditions  of  issue,  conversion, 
redemption,  maturities,  payment,  and  rate  and  time  of 
payment  of  interest,  not  exceeding  three  and  one-half  per 
centum  per  annum,  as  the  Secretary  of  the  Treasury  may 
prescribe.  The  principal  and  interest  thereof  shall  be  pay- 
able in  United  States  gold  coin  of  the  present  standard  of 
value  and  shall  be  exempt,  both  as  to  principal  and  inter- 
est, from  all  taxation,  except  estate  or  inheritance  taxes, 
imposed  by  authority  of  the  United  States,  or  its  posses- 
sions, or  by  any  State  or  local  taxing  authority ;  but  such 
bonds  shall  not  bear  the  circulation  privilege. 

131 


The  bonds  herein  authorized  shall  first  be  offered  at 
not  less  than  par  as  a  popular  loan,  under  such  regulations 
prescribed  by  the  Secretary  of  the  Treasury  as  will  give 
all  citizens  of  the  United  States  an  equal  opportunity  to 
participate  therein;  and  any  portion  of  the  bonds  so  of- 
fered and  not  subscribed  for  may  be  otherwise  disposed  of 
at  not  less  than  par  by  the  Secretary  of  the  Treasury ;  but 
no  commissions  shall  be  allowed  or  paid  on  any  bonds 
issued  under  authority  of  this  Act. 

Sec,  2.  That  for  the  purpose  of  more  effectually 
providing  for  the  national  security  and  defense  and  prose- 
cuting the  war  by  establishing  credits  in  the  United  States 
for  foreign  governments,  the  Secretary  of  the  Treasury, 
with  the  approval  of  the  President,  is  hereby  authorized, 
on  behalf  of  the  United  States,  to  purchase,  at  par,  from 
such  foreign  governments  then  engaged  in  war  with  the 
enemies  of  the  United  States,  their  obligations  hereafter 
issued,  bearing  the  same  rate  of  interest  and  containing  in 
their  essentials  the  same  terms  and  conditions  as  those  of 
the  United  States  issued  under  authority  of  this  Act;  to 
enter  into  such  arrangements  as  may  be  necessary  or  desir- 
able for  establishing  such  credits  and  for  purchasing  such 
obligations  of  foreign  governments  and  for  the  subsequent 
payment  thereof  before  maturity,  but  such  arrangements 
shall  provide  that  if  any  of  the  bonds  of  the  United  States 
issued  and  used  for  the  purchase  of  such  foreign  obliga- 
tions shall  thereafter  be  converted  into  other  bonds  of  the 
United  States  bearing  a  higher  rate  of  interest  than  three 
and  one-half  per  centum  per  annum  under  the  provisions 
of  section  five  of  this  Act,  then  and  in  that  event  the 
obligations  of  such  foreign  governments  held  by  the  United 
States  shall  be,  by  such  foreign  governments,  converted  in 
like  manner  and  extent  into  obligations  bearing  the  same 
rate  of  interest  as  the  bonds  of  the  United  States  issued 
under  the  provisions  of  section  five  of  this  Act.  For  the 
purposes  of  this  section  there  is  appropriated,  out  of  any 
money  in  the  Treasury  not  otherwise  appropriated,  the 
sum  of  $3,000,000,000,  or  so  much  thereof  as  may  be  nec- 
essary: Provided,  That  the  authority  granted  by  this 
section  to  the  Secretary  of  the  Treasury  to  purchase  bonds 

132 


from  foreign  governments,  as  aforesaid,  shall  cease  upon 
the  termination  of  the  war  between  the  United  States  and 
the  Imperial  German  Government. 

Sec.  3.  That  the  Secretary  of  the  Treasury,  under 
such  terms  and  conditions  as  he  may  prescribe,  is  hereby 
authorized  to  receive  on  or  before  maturity  payment  for 
any  obligations  of  such  foreign  governments  purchased  on 
behalf  of  the  United  States,  and  to  sell  at  not  less  than  the 
purchase  price  any  of  such  obligations  and  to  apply  the 
proceeds  thereof,  and  any  payments  made  by  foreign  gov- 
ernments on  account  of  their  said  obligations  to  the  re- 
demption or  purchase  at  not  more  than  par  and  accrued 
interest  of  any  bonds  of  the  United  States  issued  under 
authority  of  this  Act;  and  if  such  bonds  are  not  available 
for  this  purpose  the  Secretary  of  the  Treasury  shall  redeem 
or  purchase  any  other  outstanding  interest-bearing  obliga- 
tions of  the  United  States  which  may  at  such  time  be  sub- 
ject to  call  or  which  may  be  purchased  at  not  more  than 
par  and  accrued  interest. 

Sec.  4.  That  the  Secretary  of  the  Treasury,  in  his 
discretion,  is  hereby  authorized  to  issue  the  bonds  not 
already  issued  heretofore  authorized  by  section  thirty-nine 
of  the  Act  approved  August  fifth,  nineteen  hundred  and 
nine,  entitled  "An  Act  to  provide  revenue,  equalize  duties, 
and  encourage  the  industries  of  the  United  States,  and  for 
other  purposes";  section  one  hundred  and  twenty-four  of 
the  Act  approved  June  third,  nineteen  hundred  and  six- 
teen, entitled  "An  Act  for  making  further  and  more  effec- 
tual provision  for  the  national  defense,  and  for  other  pur- 
poses"; section  thirteen  of  the  Act  of  September  seventh, 
nineteen  hundred  and  sixteen,  entitled  "An  Act  to  estab- 
lish a  United  States  shipping  board  for  the  purpose  of 
encouraging,  developing,  and  creating  a  naval  auxiliary 
and  a  naval  reserve  and  a  merchant  marine  to  meet  the 
requirements  of  the  commerce  of  the  United  States  with 
its  Territories  and  possessions  and  with  foreign  countries, 
to  regulate  carriers  by  water  engaged  in  the  foreign  and 
interstate  commerce  of  the  United  States,  and  for  other 
purposes";   section   four  hundred   of    the  Act  approved 

133 


March  third,  nineteen  hundred  and  seventeen,  entitled 
"An  Act  to  provide  increased  revenue  to  defray  the  ex- 
penses of  the  increased  appropriations  for  the  Army  and 
Navy  and  the  extensions  of  fortifications,  and  for  other 
purposes";  and  the  pubHc  resolution  approved  March 
fourth,  nineteen  hundred  and  seventeen,  entitled,  "Joint 
resolution  to  expedite  the  delivery  of  materials,  equip- 
ment, and  munitions  and  to  secure  more  expeditious  con- 
struction of  ships,"  in  the  manner  and  under  the  terms  and 
conditions  prescribed  in  section  one  of  this  Act. 

That  the  Secretary  of  the  Treasury  is  hereby  au- 
thorized to  borrow  on  the  credit  of  the  United  States  from 
time  to  time,  in  addition  to  the  sum  authorized  in  section 
one  of  this  Act,  such  additional  amount,  not  exceeding 
$63,945,460  as  may  be  necessary  to  redeem  the  three  per 
cent,  loan  of  nineteen  hundred  and  eight  to  nineteen  hun- 
dred and  eighteen,  maturing  August  first,  nineteen  hun- 
dred and  eighteen,  and  to  issue  therefor  bonds  of  the 
United  States  in  the  manner  and  under  the  terms  and 
conditions  prescribed  in  section  one  of  this  Act. 

Sec.  5.  That  any  series  of  bonds  issued  under  au- 
thority of  sections  one  and  four  of  this  Act  may,  under 
such  terms  and  conditions  as  the  Secretary  of  the  Treasury 
may  prescribe,  be  convertible  into  bonds  bearing  a  higher 
rate  of  interest  than  the  rate  at  which  the  same  were  issued 
if  any  subsequent  series  of  bonds  shall  be  issued  at  a  higher 
rate  of  interest  before  the  termination  of  the  war  between 
the  United  States  and  the  Imperial  German  Government, 
the  date  of  such  termination  to  be  fixed  by  a  proclamation 
of  the  President  of  the  United  States. 

Sec.  6.  That  in  addition  to  the  bonds  authorized  by 
sections  one  and  four  of  this  Act,  the  Secretary  of  the 
Treasury  is  authorized  to  borrow  from  time  to  time,  on  the 
credit  of  the  United  States,  for  the  purposes  of  this  Act 
and  to  meet  public  expenditures  authorized  by  law,  such 
sum  or  sums  as,  in  his  judgment,  may  be  necessary,  and  to 
issue  therefor  certificates  of  indebtedness  at  not  less  than 
par  in  such  form  and  subject  to  such  terms  and  conditions 
and  at  such  rate  of  interest,  not  exceeding  three  and  one- 

134 


half  per  centum  per  annum,  as  he  may  prescribe;  and  each 
certificate  so  issued  shall  be  payable,  with  the  interest 
accrued  thereon,  at  such  time,  not  exceeding  one  year 
from  the  date  of  its  issue,  as  the  Secretary  of  the  Treasury 
may  prescribe.  Certificates  of  indebtedness  herein  au- 
thorized shall  not  bear  the  circulation  privilege,  and  the 
sum  of  such  certificates  outstanding  shall  at  no  time  exceed 
in  the  aggregate  $2,000,000,000,  and  such  certificates  shall 
be  exempt,  both  as  to  principal  and  interest,  from  all  taxa- 
tion, except  estate  or  inheritance  taxes,  imposed  by  au- 
thority of  the  United  States,  or  its  possessions,  or  by  any 
State  or  local  taxing  authority. 

Sec.  7.  That  the  Secretary  of  the  Treasury,  in  his 
discretion,  is  hereby  authorized  to  deposit  in  such  banks 
and  trust  companies  as  he  may  designate  the  proceeds  or 
any  part  thereof  arising  from  the  sale  of  the  bonds  and 
certificates  of  indebtedness  authorized  by  this  Act,  or  the 
bonds  previously  authorized  as  described  in  section  four  of 
this  Act,  and  such  deposits  may  bear  such  rate  of  interest 
and  be  subject  to  such  terms  and  conditions  as  the  Secre- 
tary of  the  Treasury  may  prescribe:  Provided,  That  the 
amount  so  deposited  shall  not  in  any  case  exceed  the 
amount  withdrawn  from  such  bank  or  trust  company,  and 
invested  in  such  bonds  or  certificates  of  indebtedness  plus 
the  amount  so  invested  by  such  bank  or  trust  company, 
and  such  deposits  shall  be  secured  in  the  manner  required 
for  other  deposits  by  Section  5153,  Revised  Statutes,  and 
amendments  thereto;  Provided  further ,  That  the  provisions 
of  Section  5191  of  the  Revised  Statutes  as  amended  by  the 
Federal  Reserve  Act  and  the  amendments  thereof,  with 
reference  to  the  reserves  required  to  be  kept  by  national 
banking  institutions  and  other  member  banks  of  the 
Federal  Reserve  System,  shall  not  apply  to  deposits  of 
public  monies  by  the  United  States  in  designated  deposi- 
taries. 

Sec.  8.  That  in  order  to  pay  all  necessary  expenses, 
including  rent,  connected  with  any  operations  under  this 
Act,  a  sum  not  exceeding  one-tenth  of  one  per  centum  of 
the  amount  of  bonds  and  one-tenth  of  one  per  centum  of 

135 


the  amount  of  certificates  of  indebtedness  herein  author- 
ized is  hereby  appropriated,  or  as  much  thereof  as  may  be 
necessary,  out  of  any  money  in  the  Treasury  not  otherwise 
appropriated,  to  be  expended  as  the  Secretary  of  the 
Treasury  may  direct:  Provided,  That,  in  addition  to  the 
reports  now  required  by  law,  the  Secretary  of  the  Treasury 
shall,  on  the  first  Monday  in  December,  nineteen  hundred 
and  seventeen,  and  annually  thereafter,  transmit  to  the 
Congress  a  detailed  statement  of  all  expenditures  under 
this  Act. 


136 


National  Bank  of  Commerce 
in  Nov-  York 

ORGANIZED  1839 

President 
James  S.  Alexander 

Vice-Presidents 
R.  G.  Hutcliins,  Jr.  Stevenson  E.  Ward 

Herbert  P.  Howell  John  E.  Rovensky 

J.  Howard  Ardrey  Guy  Emerson 

Cashier 
Fans  R.  Russell 

Assistant  Cashiers 
A.  J.  Oxenkam  John  J.  Keenan 

William  M.  St.  John  Gaston  L.  Ghegan 

Louis  A.  Keidel  A.  F.  Brodenck 

A.  F.  Maxwell  Everett  E.  Risley 

H.  P.  Barrand 

Auditor  Manager  Foreign  Department 

Richard  W.  Saunders  Franz  Meyer 

Statement  of  Condition 

May  1,  1917 

RESOURCES 

Loans  and  Discounts           -          -          -          _  $213,573,592.25 

Bonds,  Securities,  etc.              -          .          -          _  32,203.265.01 

Banking  House 2,000,000.00 

Due  from  Banks  and  Bankers          -          -          _  32,378,420.92 
Cash,  Exchanges  and  due  from  Federal   Re- 
serve Bank         103,069,036.72 

Customers    Liability  under  Letters  of  Credit, 

Acceptances,  etc. 29,590,321.58 

Interest  Accrued        -----  704,794.53 

$413,519,431.01 

LIABILITIES 

Capital,  Surplus  and  Undivided  Profits     -  -    $  44.850,500.65 

Deposits 338,068,215.86 

National  Bank  Notes  outstanding              -          -  155,000.00 

Letters  of  Credit  and  Acceptances       -          -  26,912,426.24 

Unearned  Discount          -----  790,516.86 

Other  Liabilities 2,742,771.40 

$413,519,431.01 


PUBLICATIONS 


The  following  recent  publications  of  the 
National  Bank  of  Commerce  in  New  York 
are  still  available  for  distribution  to  per- 
sons interested: 

EXCESS  PROFITS  TAX  LAW— Official  Text  with  Re- 
lating Sections  of  the  Income  Tax  Law,  March  3, 1917. 

THE  VIRGIN  ISLANDS— A  Description  of  the  Com- 
mercial Value  of  the  Danish  West  Indies,  April,  1917. 

SAVING  AMERICA  FROM  BANKRUPTCY— An  Inti- 
mate Story  of  the  First  Civil  War  Loan,  by  Edith  Vail 
Taylor,  April,  1917. 

GOLD— A  Study  of  the  Shifting  of  the  Golden  Basis 
of  Credit  from  Belligerents  to  Neutrals  and  the  Dan- 
gers in  the  Situation,  by  J.  E.  Rovensky,  April,  1917. 

THE  PRINCIPLES  INVOLVED  IN  WAR  FINAN- 
CING— By  James  S.  Alexander,  May,  1917. 

WAR  FINANCE  PRIMER,  May,  1917. 


SERVICE  DEPARTMENT 

National  Bank  of  Commerce 
in  New^  York 


„,re  ON  THE  LAST  DATE 

;rr^OF26  CENTS 
.M  INITIAL  FINE  O*         „  ^eruRN 

DAY     AND    TO     »    •  ^^^^^^__ 

OVERDUE- 


LD  21-l00m-7,'33 


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UNIVERSITY  OF  CALIFORNIA  LIBRARY 


